SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report: September 21, 1995
FEDERATED DEPARTMENT STORES, INC.
1440 Broadway, New York, New York 10018
(212) 840-1440
-and-
7 West Seventh Street, Cincinnati,Ohio 45202
(513) 579-7000
Delaware 1-13536 13-3324058
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(State of Incorporation) (Commission File No.) (IRS Id. No.)
Exhibit Index on Page 25
<PAGE>
Item 5. Other Events.
-------------
This Current Report on Form 8-K is being filed with the Securities and
Exchange Commission (the "Commission") by Federated Department Stores, Inc.
("Federated") for the purpose of setting forth the following information to be
incorporated by reference into Federated's Registration Statement on Form S-3
(File No. 33-59691):
RECENT DEVELOPMENTS
On August 14, 1995, Federated, a wholly owned subsidiary of Federated
("Newco"), and Broadway Stores, Inc. ("Broadway") entered into an agreement (the
"Merger Agreement") pursuant to which, on the terms and subject to the
conditions set forth therein, Newco will be merged with and into Broadway (the
"Merger"), and Broadway will thereby become a subsidiary of Federated. The
Merger is intended to permit Federated to broaden its base of department store
operations in the areas in which Broadway's department stores are operated
(primarily California and the Southwestern United States).
At the effective time of the Merger (the "Effective Time"), among
other things, each outstanding share of Broadway common stock will be converted
into 0.27 shares of common stock of Federated ("Common Stock"), resulting in the
issuance of approximately 12.7 million shares of Common Stock. In addition, the
Merger will result in (i) adjustments to outstanding options to purchase
Broadway common stock so that such options will become exercisable in the
aggregate to purchase approximately 1.5 million shares of Common Stock at prices
ranging from $14.81 to $51.85 per share and (ii) adjustments to outstanding
warrants to purchase Broadway common stock, and the issuance of Broadway
preferred stock exchangeable for warrants to purchase Common Stock, so that such
adjusted warrants and such warrants issuable upon the exchange of such preferred
stock will be exercisable in the aggregate to purchase approximately 0.6 million
shares of Common Stock at a price of $62.96 per share (subject to adjustment in
certain circumstances).
In connection with the Merger Agreement, Federated and Broadway's
majority stockholder entered into an agreement, pursuant to which, among other
things, such stockholder agreed to vote all of the shares of Broadway common
stock owned by it in favor of the adoption of the Merger Agreement and granted
to Federated an option to purchase such shares for consideration consisting of
0.27 shares of Common Stock for each such share of Broadway common stock. In
addition, Federated, a wholly owned subsidiary of Federated ("FNC II"), and The
Prudential Insurance Company of America ("Prudential") entered into an agreement
(the "Prudential Agreement") providing for the purchase by FNC II from
Prudential of certain mortgage indebtedness of Broadway (the
"Broadway/Prudential Mortgage Debt") for consideration consisting
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of a $221.1 million promissory note of FNC II and, at FNC II's option, either
$200.0 million in cash or a number of shares of the Common Stock determined in
accordance with the provisions of the Prudential Agreement. Each of Prudential
and Broadway's majority stockholder was granted certain registration rights with
respect to the shares of Common Stock issuable to it in connection with the
transactions described above.
The obligations of Federated and Broadway to consummate the Merger are
conditioned upon, among other things, (i) adoption of the Merger Agreement by
Broadway's stockholders; (ii) the absence of any order or injunction that
prohibits the consummation of the transactions contemplated by the Merger
Agreement; and (iii) all consents, authorizations, orders, and approvals of any
governmental authority required in connection with the Merger Agreement having
been obtained, other than any such consents, authorizations, orders, or
approvals which, if not obtained, would not have a material adverse effect on
the business, financial condition, or results of operations of Broadway. The
Federal Trade Commission (the "FTC") and the Antitrust Division of the
Department of Justice (the "Antitrust Division") frequently scrutinize the
legality under the antitrust laws of transactions such as the Merger. At any
time before or after the Effective Time, the FTC or the Antitrust Division
could, among other things, seek under the antitrust laws to enjoin the Merger or
to cause Federated to divest itself, in whole or in part, of Broadway or of
other assets owned or businesses conducted by Federated. Under certain
circumstances, private parties and state governmental authorities could also
bring legal action under the antitrust laws challenging the Merger.
Federated anticipates that a number of Broadway's stores will be
disposed of following the Merger. As of the date hereof, however, Federated had
not entered into any agreements providing for such dispositions and there can be
no assurance that Federated will do so or as to the timing or terms thereof. If
the Merger is completed, Federated anticipates that Broadway's retained
department stores will be converted into Macy's, Bullock's, or Bloomingdale's
stores commencing early in 1996.
On or about the date hereof, Federated intends to enter into an
agreement providing for the issuance and sale in an underwritten public offering
of $250.0 million aggregate principal amount of Convertible Subordinated
Notes Due 2003 of Federated (the "Notes"), and for the grant to the underwriters
of such offering of an option to purchase up to an additional $37.5 million
aggregate principal amount of Notes to cover over-allotments, if any. The net
proceeds of the offering of the Notes (the "Offering") are estimated to be
approximately $243.8 million (assuming that the Underwriters' over-allotment
option is not exercised). Of such amount, up to approximately $145.0 million
is expected to be used to fund the aggregate purchase price for such
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<PAGE>
of the 6-1/4% Convertible Senior Subordinated Notes Due 2000 of Broadway (the
"Broadway Convertible Notes") that Broadway may be required to purchase pursuant
to a mandatory offer to repurchase all of the Broadway Convertible Notes
following the Merger. The remainder of such amount, together with other funds
available to Federated, is expected to be used to pay certain costs and expenses
associated with the Merger and the conversion of certain of Broadway's stores
into Macy's, Bullock's, and Bloomingdale's stores (including costs and expenses
associated with the remodelling of such stores in connection with such
conversions). Prior to the application thereof as described above, the net
proceeds of the Offering are expected to be used by Federated to temporarily
reduce revolving credit borrowings. If the Merger were to fail to occur (which
failure is not anticipated), it is anticipated that the net proceeds of the
Offering would be used for general corporate purposes, which may include the
repayment of indebtedness outstanding from time to time, acquisitions, new store
construction, store expansions, and further investments in technology.
See "Capitalization" and "Unaudited Pro Forma Financial Information"
for certain information giving effect to the consummation of the Merger, the
purchase by FNC II of the Broadway/Prudential Mortgage Debt, and the issuance
and sale of the Notes, as though such transactions had been consummated as of
specified historical dates.
CAPITALIZATION
The following table sets forth (i) the capitalization of each of
Federated and Broadway as of July 29, 1995, (ii) the pro forma capitalization of
Federated as of that date, giving effect to the consummation of the Merger and
the purchase by FNC II of the Broadway/Prudential Mortgage Debt for
consideration assumed to consist of a $221,149,531 promissory note of FNC II,
6,751,055 shares of the Common Stock, and $6,751,051 in cash, and (iii) the pro
forma capitalization of Federated as of such date, as adjusted to give effect to
the Offering (assuming no exercise of the underwriters' over-allotment option)
and the application of the net proceeds thereof to repurchase the entire
outstanding principal amount of the Broadway Convertible Notes and to
temporarily reduce revolving credit borrowings (see "Recent Developments"), as
if such transactions had been consummated as of such date.
The pro forma information set forth below is presented for
illustrative purposes only and is not necessarily indicative of what Federated's
actual consolidated capitalization would have been had the foregoing
transactions been consummated on July 29, 1995, nor does it give effect to (a)
any transactions other than the foregoing transactions and those discussed in
the Notes to Unaudited Pro Forma Financial Information contained herein or (b)
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Federated's or Broadway's respective results of operations since July 29, 1995.
Accordingly, the pro forma information set forth below does not purport to be
indicative of Federated's consolidated capitalization as of the date hereof, the
Effective Time, or any other future date.
The following table should be read in conjunction with the historical
financial statements of Federated and Broadway, the unaudited pro forma
financial information and the related notes, and the other information contained
herein.
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<PAGE>
<TABLE><CAPTION>
PRO FORMA CAPITALIZATION
July 29, 1995
(unaudited)
(in thousands)
Historical As Adjusted
-------------------------
for the
Federated Broadway Pro Forma Offering
--------- ---------- --------- -------------
<S> <C> <C> <C> <C>
Short-term debt:
Bank credit facility . . . . . . . . . . $ 200,000 $ ---- $ 200,000 $ 100,000
Working capital facility . . . . . . . . ---- 51,676 51,676 51,676
Current portion of long-term debt . . . . 59,988 6,750 66,738 66,738
---------- ---------- ---------- -----------
Total short-term debt . . . . . . . . 259,988 58,426 318,414 218,414
---------- ---------- ---------- -----------
Long-term debt:
Bank credit facility . . . . . . . . . . 1,700,000 ---- 1,700,000 1,700,000
Receivables backed certificates . . . . . 1,654,052 ---- 1,654,052 1,654,052
Receivable based financing . . . . . . . ---- 503,584 503,584 503,584
The Notes . . . . . . . . . . . . . . . . ---- ---- ---- 250,000
Senior notes . . . . . . . . . . . . . . 450,000 ---- 450,000 450,000
Mortgages . . . . . . . . . . . . . . . 416,844 521,384 517,078 517,078
Senior convertible discount notes . . . 307,383 ---- 307,383 307,383
FNC note . . . . . . . . . . . . . . . . ---- ---- 221,150 221,150
Broadway Convertible Notes (a) . . . . . ---- 143,750 143,750 ----
Tax notes . . . . . . . . . . . . . . . . 174,749 ---- 174,749 174,749
Note monetization facility (b) . . . . . 352,000 ---- 352,000 352,000
Capitalized leases . . . . . . . . . . . 65,633 39,930 105,563 105,563
Other . . . . . . . . . . . . . . . . . 784 ---- 784 784
---------- ---------- ----------- -----------
Total long-term debt . . . . . . . . 5,121,445 1,208,648 6,130,093 6,236,343
---------- ---------- ----------- -----------
Total debt . . . . . . . . . . . . 5,381,433 1,267,074 6,448,507 6,454,757
---------- ---------- ----------- -----------
Shareholders' equity:
Common stock outstanding . . . . . . . . 2,126 470 2,321 2,321
Preferred stock outstanding . . . . . . ---- 8 ---- ----
Additional paid-in capital . . . . . . . 3,712,681 502,545 4,269,068 4,269,068
Retained earnings (deficit) . . . . . . 369,948 (197,610) 369,948 369,948
Treasury stock . . . . . . . . . . . . . (560,436) ---- (560,436) (560,436)
---------- ---------- ----------- -----------
Total shareholders' equity . . . . . 3,524,319 305,413 4,080,901 4,080,901
---------- ---------- ----------- -----------
Total capitalization . . . . . . . $8,905,752 $1,572,487 $10,529,408 $10,535,658
========== ========== =========== ===========
Ratio of total debt to total capitalization
(excluding note monetization facility) . 58.80% 80.58% 59.90% 59.93%
========= ========== ========= ===========
</TABLE>
-------------------
(a) Following the consummation of the Merger, Broadway will be required to
offer to purchase all of the outstanding Broadway Convertible Notes at a
price equal to the principal amount thereof plus accrued interest.
(b) The note monetization facility represents debt of a trust of which
Federated is the beneficiary. The repayment of such debt is nonrecourse
to Federated and its assets (other than its interests in such trust).
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<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial statements of Federated give
effect to (i) the consummation of the Merger and the purchase by FNC II of the
Broadway/Prudential Mortgage Debt for consideration assumed to consist of a
$221,149,531 promissory note of FNC II, 6,751,055 shares of Common Stock, and
$6,751,051 in cash (the "Debt Purchase") and (ii) the Offering (assuming no
exercise of the underwriters' over-allotment option) and the application of the
net proceeds thereof to repurchase the entire outstanding principal amount of
the Broadway Convertible Notes and to temporarily reduce revolving credit
borrowings (see "Recent Developments"), in each case as if the foregoing
transactions had been consummated on July 29, 1995, in the case of the Unaudited
Pro Forma Balance Sheet at July 29, 1995, and on January 30, 1994, in the case
of the Unaudited Pro Forma Statements of Operations for the 26 weeks ended July
29, 1995 and the 52 weeks ended January 28, 1995. Because Federated's
acquisition of Macy's on December 19, 1994 was accounted for under the purchase
method of accounting, Federated's historical statements of operations give
effect to the results of operations of the R.H. Macy & Co. ("Macy's") business
only from and after such date. The Unaudited Pro Forma Statement of Operations
for the 52 weeks ended January 28, 1995 gives effect to Federated's acquisition
of Macy's as if such acquisition had been consummated on January 30, 1994 rather
than on December 19, 1994.
The following unaudited pro forma financial information is presented for
illustrative purposes only and is not necessarily indicative of what Federated's
actual financial position or results of operations would have been had the
foregoing transactions, including the acquisition of Macy's, been consummated on
such dates, nor does it give effect to (a) any transactions other than those
discussed above or in the accompanying Notes to Unaudited Pro Forma Financial
Information, (b) Federated's or Broadway's results of operations since July 29,
1995, (c) the synergies, cost savings, and one-time charges expected to result
from the Merger and from the acquisition of Macy's, or (d) the effects of sales
of stores which may occur subsequent to the Merger. Accordingly, the pro forma
financial information does not purport to be indicative of Federated's financial
position or results of operations as of the date hereof or for any period ended
on the date hereof, as of the Effective Time, for any period ending at the
Effective Time, or as of or for any other future date or period.
The following unaudited pro forma financial information is based in part on
the historical financial statements of Federated and Broadway (and, with respect
to the 52-weeks ended January 28, 1995, certain financial data of Macy's) and
should
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be read in conjunction with such historical financial statements, the related
notes, and the other information contained herein or in the exhibits hereto.
Certain historical financial statements of Broadway and Macy's are filed as
Exhibits 99.1 and 99.2, respectively, hereto and are incorporated herein by
reference. Certain items derived from Broadway's historical financial
statements have been reclassified to conform to the pro forma presentation.
In the preparation of the following unaudited pro forma financial
information, it has been generally assumed that the historical book value of
Broadway's assets approximates the fair value thereof, as an independent
valuation has not been completed. Federated will be required to determine the
fair value of the assets of Broadway (including intangible assets) as of the
Effective Time. Although such determination of fair value is not presently
expected to result in values that are materially greater or less than the values
assumed in the preparation of the following unaudited pro forma financial
information, there can be no assurance with respect thereto.
The retail business is seasonal in nature, with a higher proportion of sales
and earnings usually being generated in the months of November and December than
in other periods. Because of this seasonality and other factors, results of
operations for an interim period are not necessarily indicative of results of
operations for an entire fiscal year.
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<PAGE>
<TABLE><CAPTION>
UNAUDITED PRO FORMA BALANCE SHEET
July 29, 1995
(in thousands)
Historical Pro Forma Adjustments
---------- ---------------------
Federated Broadway Debit Credit Pro Forma
--------- -------- ----- ------ ---------
<S> <C> <C> <C> <C> <C>
ASSETS:
Current Assets:
Cash . . . . . . . . . . $ 238,173 $ 15,901 $ $ 8,000(b) $239,323
6,751(c)
Accounts Receivable . . 2,157,512 559,939 2,717,451
Merchandise Inventories
2,694,564 390,825 12,313(b) 3,054,164
18,912(b)
Supplies and prepaid
expenses . . . . . . . 107,509 25,418 15,800(b) 117,127
Deferred income taxes . 198,123 198,123
----------- ------------- -----------
Total Current Assets . . 5,395,881 992,083 6,326,188
Property and Equipment -
net . . . . . . . . . 5,261,698 885,002 6,146,700
Intangible Assets - net 1,027,033 ------ 134,937(b) 1,161,970
Notes Receivable . . . . 407,276 ------ 407,276
Other Assets . . . . . . 365,436 34,521 6,250(a) 20,757(b) 385,450
----------- ----------- -------- -------- -----------
Total Assets . . . . . $12,457,324 $ 1,911,606 $141,187 $82,533 $14,427,584
=========== =========== ======== ======= ===========
LIABILITIES AND SHAREHOLDERS'
EQUITY:
Current Liabilities:
Short-term debt . . . . . $ 259,988 $ 58,426 $100,000(a) $ $218,414
Accounts payable and
accrued liabilities . . 2,139,335 220,324 2,359,659
Income taxes . . . . . . 35,729 824 36,553
----------- ------------ -----------
Total Current
Liabilities . . . . . 2,435,052 279,574 2,614,626
Long-Term Debt . . . . . 5,121,445 1,208,648 421,150(c) 221,150(c) 6,236,343
143,750(a) 250,000(a)
Deferred Income Taxes . . 873,285 14,850 888,135
Other Liabilities . . . . 503,223 103,121 4,300(b) 7,718(b) 607,579
2,183(b)
Shareholders' Equity . . 3,524,319 305,413 305,413(b) 363,333(b) 4,080,901
193,249(c)
----------- ----------- -------- -------- -----------
Total Liabilities and
Shareholders' Equity $12,457,324 $ 1,911,606 $976,796 $1,035,450 $14,427,584
=========== ====================== ========== ===========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Financial Information.
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<TABLE><CAPTION>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
For the 26 Weeks Ended July 29, 1995
(in thousands, except for per share data)
Historical Pro Forma Adjustments
---------- ---------------------
Federated Broadway Debit Credit Pro Forma
--------- -------- ----- ------ ---------
<S> <C> <C> <C> <C> <C>
Net sales, including leased
department sales . . . . . . $ 6,035,255 $ 884,550 $ $ $ 6,919,805
----------- ----------- -----------
Cost of sales . . . . . . . . 3,686,836 676,550 ---- (a) 103,075 (d) 4,276,111
15,800 (b)
Selling, general and
administrative expenses . . 2,137,846 226,247 3,374 (c) 2,470,542
103,075 (d)
Business integration and
consolidation expenses . . . 172,345 ---- 172,345
Charitable contribution to
Federated Department Stores
Foundation . . . . . . . . . 25,581 ---- 25,581
----------- ---------- ----------
Operating income (loss) . . . 12,647 (18,247) (24,774)
Interest expense . . . . . . (223,558) (62,499) 8,198 (e) 28,486 (f) (264,524)
1,245 (g)
Interest income . . . . . . . 22,790 ---- 22,790
----------- ---------- ----------
Loss before income taxes . . (188,121) (80,746) (266,508)
Federal, state and local income
tax benefit . . . . . . . . . . 64,196 ---- 30,755 (h) 94,951
----------- ----- ----------
Net loss . . . . . . . . . . . $ (123,925) $ (80,746) $ (171,557)
=========== ========== ==========
<CAPTION>
OTHER INCOME STATEMENT DATA
<S> <C> <C> <C>
EBITDA (i) . . . . . . . . . . $ 441,354 $ 425 $ 425,979
Loss per share of common stock (0.68) (1.72) (0.85)
Deficiency of earnings to fixed
charges . . . . . . . . . . . 188,807 81,260 267,708
</TABLE>
See accompanying Notes to Unaudited Pro Forma Financial Information.
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<TABLE><CAPTION>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
For the 52 Weeks Ended January 28, 1995
(in thousands, except for per share data)
Pro Forma Adjustments
for Macy's Acquisition
-------------------------
Historical Historical
Federated Debit Credit Pro Forma Broadway
---------- ----- ------ --------- ----------
<S> <C> <C> <C> <C> <C>
Net sales, including leased department sales . . . . . . $8,315,877 $ $5,631,177 (A) $13,947,054 $2,086,804
---------- ---------- ----------
Cost of sales . . . . . . . . . . . . . . . . . . . . . 5,131,363 3,405,824 (A) 8,537,187 1,560,035
Selling, general and administrative expenses . . . . . . 2,549,122 2,110,615 (A) 22,682 (D) 4,575,351 463,075
22,975 (B) 84,679 (E)
Unusual items . . . . . . . . . . . . . . . . . . . . . 85,867 195,719 (A) 281,586 ---
---------- ----------- ----------
Operating income . . . . . . . . . . . . . . . . . . . . 549,525 552,930 63,694
Interest expense . . . . . . . . . . . . . . . . . . . . (262,115) 146,104 (A) (465,217) (100,904)
56,998 (C)
Interest income . . . . . . . . . . . . . . . . . . . . 43,874 255 (A) 44,129 ---
---------- ----------- ----------
Income (loss) before earthquake loss,
reorganization items and income taxes . . . . . . . . 331,284 131,842 (37,210)
Earthquake loss . . . . . . . . . . . . . . . . . . . . -- 15,000 (A) (15,000) ---
Reorganization items . . . . . . . . . . . . . . . . . . -- 50,914 (A) 50,914 ---
---------- ----------- ----------
Income (loss) before income taxes . . . . . . . . . . . 331,284 167,756 (37,210)
Federal, state and local income tax expense . . . . . . (143,668) 31,003 (F) (86,011) (150)
26,654 (A)
---------- ----------- ----------
Income (loss) from continuing operations . . . . . . . . $ 187,616 $ 81,745 $ (37,360)
========== =========== ==========
<CAPTION>
OTHER INCOME STATEMENT DATA
<S> <C> <C> <C>
EBITDA (i) . . . . . . . . . . . . . . . . . . . . . . . $ 921,253 $ 1,303,359 $ 95,770
Income (loss) from continuing operations
per share of common stock . . . . . . . . . . . . . . $ 1.41 $ 0.45 $ (0.80)
Ratio of earnings to fixed charges . . . . . . . . . . . 1.99x 1.28x ---
Deficiency of earnings to fixed charges . . . . . . . . . -- --- 40,022
<PAGE>
<CAPTION>
Pro Forma Adjustments for
the Merger, the Debt
--------------------
Purchase and the Offering
-------------------------
Debit Credit Pro Forma
----- ------ ---------
<S> <C> <C> <C>
Net sales, including leased department sales . . . . . . $ $ $16,033,858
-----------
Cost of Sales . . . . . . . . . . . . . . . . . . . . . 295 (a) 201,242 (d) 9,896,275
-- (b)
Selling, general and administrative expenses . . . . . . 6,747 (c) 5,246,415
201,242 (d)
Unusual Items . . . . . . . . . . . . . . . . . . . . . 281,586
-----------
Operating income . . . . . . . . . . . . . . . . . . . . 609,582
Interest expense . . . . . . . . . . . . . . . . . . . . 15,626 (e) 54,253 (f) (526,296)
-- 1,198 (g)
Interest income . . . . . . . . . . . . . . . . . . . . 44,129
-----------
Income (loss) before earthquake loss,
reorganization items and income taxes . . . . . . . . 127,415
Earthquake loss . . . . . . . . . . . . . . . . . . . . (15,000)
Reorganization items . . . . . . . . . . . . . . . . . . 50,914
-----------
Income (loss) before income taxes . . . . . . . . . . . 163,329
Federal, state and local income tax expense . . . . . . 1,101 (h) (87,262)
-----------
Income (loss) from continuing operations . . . . . . . . $ 76,067
===========
<CAPTION>
OTHER INCOME STATEMENT DATA
<S> <C> <C>
EBITDA (i) . . . . . . . . . . . . . . . . . . . . . . . $ 1,398,834
Income (loss) from continuing operations
per share of common stock . . . . . . . . . . . . . . $ 0.38
Ratio of earnings to fixed charges . . . . . . . . . . . 1.24x
Deficiency of earnings to fixed charges . . . . . . . . . --
</TABLE>
See accompanying Notes to Unaudited Pro Forma Financial Information.
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NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION
Note 1. Unaudited Pro Forma Balance Sheet Adjustments
(a) To record the receipt of net proceeds of the Offering in the amount of
$243.8 million and the application of $143.8 million of such proceeds to
repurchase the entire outstanding principal amount of the Broadway
Convertible Notes.
(b) To record: (i) the Merger, which will be accounted for under the purchase
method of accounting, and the assumed issuance of 12,692,852 shares of
Common Stock at an assumed per share price of $28.625 (which was the
closing price of such shares on the NYSE on September 20, 1995; (ii)
adjustments to reflect the net assets acquired at fair value; and (iii) the
excess of cost over net assets acquired, all as set forth below:
<TABLE><CAPTION>
Debit Credit Description
----- ------ -----------
(in thousands)
<S> <C> <C> <C>
Cash . . . . . . . $ $ 8,000 Payment of transaction costs
Merchandise inventories . 12,313 Elimination of Broadway's last-in,
first-out ("LIFO") adjustment
18,912 Elimination of indirect costs
capitalized in Broadway's inventory
Supplies and prepaid
expenses . . . . . . . 15,800 Elimination of deferred expenses of
Broadway
Intangible assets - net . 134,937 To record excess of cost over net assets
Other assets . . . . . . 20,757 Elimination of deferred financing
costs of Broadway
Other liabilities . . . . 7,718 Adjustment to fair value of
Broadway's pension liability
4,300 Adjustment to fair value of
Broadway's other postretirement
benefits liabilities
2,183 Elimination of Broadway's rent
abatement reserve
Shareholders' equity . . 305,413 Elimination of Broadway's
shareholders' equity
363,333 Issuance of equity pursuant to the
--------- --------
Merger
$446,833 $446,833
======== ========
</TABLE>
(c) To record the purchase by FNC II of the Broadway/Prudential Mortgage Debt
for consideration assumed to consist of a $221,149,531 promissory note of
FNC II, 6,751,055 shares of Common Stock, and $6,751,051 in cash. If FNC II
elects to pay a portion of the purchase price under the Prudential Agreement
in the form of Common Stock, such purchase price will be determined with
reference to actual market prices for shares of Common Stock (which market
prices may be higher or lower than the $28.625 per share price assumed for
purposes of the pro forma information).
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<PAGE>
Note 2. Unaudited Pro Forma Statements of Operations for the 26 Weeks Ended
July 29, 1995 and the 52 Weeks Ended January 28, 1995--Adjustments for
the Merger, the Debt Purchase, and the Offering.
(a) To adjust Broadway's cost of sales to eliminate the effects of the
capitalization of inventory costs which will be expensed subsequent to the
Merger.
(b) To adjust Broadway's cost of sales to eliminate the effects of deferred
expenses written off in connection with the Merger.
(c) To record amortization of estimated excess of cost over net assets acquired
over an assumed 20-year period.
(d) To reclassify buying and occupancy costs as selling, general, and
administrative expenses consistent with Federated's accounting policies.
(e) To record interest expense on the promissory note issued by FNC II in
connection with the purchase of the Broadway/Prudential Mortgage Debt at
assumed rates per annum of 7.41% for the 26 weeks ended July 29, 1995 and
7.07% for the 52 weeks ended January 28, 1995.
(f) To reverse historical interest expense on the Broadway/Prudential Mortgage
Debt purchased by FNC II and to reverse amortization of deferred financing
costs.
(g) To record interest expense on the Notes at the assumed interest rate per
annum of 5.25% (which assumed rate may vary from the actual rate of interest
thereon) and to reverse historical expense interest of 6.25% per annum on
the Broadway Convertible Notes and reduce interest expense on revolving
credit borrowings.
(h) To adjust income tax expense (benefit) based upon an assumed composite
(federal, state, and local) income tax rate of 41%.
(i) EBITDA is defined for purposes of the pro forma information as earnings
before interest, taxes, depreciation, amortization, and unusual items.
EBITDA does not represent and should not be considered as an alternative to
net income or cash flow as determined by generally accepted accounting
principles.
Note 3. Unaudited Pro Forma Statement of Operations for the 52 Weeks Ended
January 28, 1995-- Adjustments for the Macy's Acquisition
(A) To record historical results of Macy's prior to December 19, 1994.
(B) To record amortization of excess of cost over net assets acquired over a 20-
year period and the fair value of Macy's trade names over a 40-year period.
(C) To record interest expense on the indebtedness incurred in connection with
the acquisition of Macy's and to reverse historical interest expense on
certain indebtedness of Macy's and Federated.
(D) To reverse amortization of deferred expense items eliminated in connection
with the acquisition of Macy's.
(E) To adjust depreciation of Macy's property and equipment to amounts based on
fair market value.
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(F) To adjust income tax expense (benefit) based upon an assumed composite
(federal, state, and local) income tax rate of 40%.
(G) Although no adjustments have been recorded in the Unaudited Pro Forma
Statements of Operations, it is estimated that Federated will have incurred
expenses in connection with the consolidation of Federated's and Macy's
operations of approximately $270.0 million in the 52 weeks subsequent to the
acquisition of Macy's (of which approximately $190.0 million had been
expensed through July 29, 1995).
DESCRIPTION OF CAPITAL STOCK
Authorized Capital Stock
Federated's certificate of incorporation provides that the authorized capital
stock of Federated consists of 500 million shares of Common Stock and 125
million shares of Preferred Stock, par value $0.01 per share (the "Preferred
Stock").
Common Stock
The holders of the Common Stock are entitled to one vote for each share held
of record on all matters submitted to a vote of stockholders. Subject to
preferential rights that may be applicable to any Preferred Stock, holders of
Common Stock are entitled to receive ratably such dividends as may be declared
by the Board of Directors of Federated out of funds legally available therefor.
In the event of a liquidation, dissolution, or winding up of Federated, holders
of Common Stock will be entitled to share ratably in all assets remaining after
payment of liabilities and the liquidation preference of any Preferred Stock.
Holders of Common Stock have no preemptive rights and have no rights to convert
their Common Stock into any other securities, and there are no redemption
provisions with respect to such shares.
Preferred Stock
The Board of Directors of Federated has the authority to issue 125 million
shares of Preferred Stock in one or more series and to fix the designations,
relative powers, preferences, limitations, and restrictions of all shares of
each such series, including without limitation dividend rates, conversion
rights, voting rights, redemption and sinking fund provisions, liquidation
preferences, and the number of shares constituting each such series, without any
further vote or action by the stockholders. The issuance of the Preferred Stock
could decrease the amount of earnings and assets available for distribution to
holders of Common Stock or adversely affect the rights and powers, including
voting rights, of the holders of Stock. The issuance of the Preferred Stock
could have the effect of delaying, deferring, or preventing a change in control
of Federated without further action by the stockholders.
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<PAGE>
Preferred Share Purchase Rights
Each outstanding share of Common Stock is accompanied by one right (a
"Right") issued pursuant to a share purchase rights agreement between Federated
and The Bank of New York, as Rights Agent (the "Share Purchase Rights
Agreement"). Each Right entitles the registered holder thereof to purchase from
Federated one one-hundredth of a share of Series A Junior Participating
Preferred Stock, par value $0.01 per share (the "Series A Preferred Shares"), of
Federated at a price (the "Purchase Price") of $62.50 per one one-hundredth of a
Series A Preferred Share, subject to adjustment.
Until the earliest to occur of the following dates (the earliest of such
dates being hereinafter called the "Rights Distribution Date"), the Rights will
be evidenced by the certificates evidencing shares of Common Stock: (i) the
close of business on the tenth business day (or such later date as may be
specified by the Board of Directors of Federated) following the first date of
public announcement by Federated that a person (other than Federated or a
subsidiary or employee benefit or stock ownership plan of Federated), together
with its affiliates and associates, has acquired, or obtained the right to
acquire, beneficial ownership of 20% or more of the outstanding Common Stock
(any such person being hereinafter called an "Acquiring Person"); (ii) the close
of business on the tenth business day (or such later date as may be specified by
the Board of Directors of Federated) following the commencement of a tender
offer or exchange offer by a person (other than Federated or a subsidiary or
employee benefit or stock ownership plan of Federated), the consummation of
which would result in beneficial ownership by such person of 20% or more of the
outstanding Common Stock; and (iii) the close of business on the tenth business
day following the first date of public announcement by Federated that a Flip-in
Event or a Flip-over Event (as such terms are hereinafter defined) has occurred.
The Share Purchase Rights Agreement provides that, until the Rights
Distribution Date, the Rights may be transferred with and only with the Common
Stock. Until the Rights Distribution Date (or earlier redemption or expiration
of the Rights), any certificate evidencing shares of Common Stock issued upon
transfer or new issuance of Common Stock will contain a notation incorporating
the Share Purchase Rights Agreement by reference. Until the Rights Distribution
Date (or earlier redemption or expiration of the Rights), the surrender for
transfer of any certificates evidencing Common Stock will also constitute the
transfer of the Rights associated with such certificates. As soon as
practicable following the Rights Distribution Date, separate certificates
evidencing the Rights ("Rights Certificates") will be mailed to holders of
record of Common Stock as of the close of business on the Rights
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<PAGE>
Distribution Date and such separate Rights Certificates alone will evidence the
Rights. No Right is exercisable at any time prior to the Rights Distribution
Date. The Rights will expire on December 19, 2004 (the "Final Expiration Date")
unless earlier redeemed or exchanged by Federated as described below. Until a
Right is exercised, the holder thereof, as such, will have no rights as a
stockholder of Federated, including without limitation the right to vote or to
receive dividends.
The Purchase Price payable, and the number of Series A Preferred Shares or
other securities issuable, upon exercise of the Rights are subject to adjustment
from time to time to prevent dilution (i) in the event of a stock dividend on,
or a subdivision, combination, or reclassification of, the Series A Preferred
Shares, (ii) upon the grant to holders of the Series A Preferred Shares of
certain rights or warrants to subscribe for or purchase Series A Preferred
Shares at a price, or securities convertible into Series A Preferred Shares with
a conversion price, less than the then-current market price of the Series A
Preferred Shares, or (iii) upon the distribution to holders of the Series A
Preferred Shares of evidences of indebtedness or cash (excluding regular
periodic cash dividends), assets, or stock (excluding dividends payable in
Series A Preferred Shares) or of subscription rights or warrants (other than
those referred to above). The number of outstanding Rights and the number of
one one-hundredths of a Series A Preferred Share issuable upon exercise of each
Right also is subject to adjustment in the event of a stock dividend on the
Common Stock payable in shares of Common Stock or a subdivision, combination, or
reclassification of the Common Stock occurring, in any such case, prior to the
Rights Distribution Date.
The Series A Preferred Shares issuable upon exercise of the Rights will not
be redeemable. Each Series A Preferred Share will be entitled to a minimum
preferential quarterly dividend payment equal to the greater of (i) $1.00 per
share and (ii) an amount equal to 100 times the aggregate dividends declared per
share of Common Stock during the related quarter. In the event of liquidation,
the holders of the Series A Preferred Shares will be entitled to a preferential
liquidation payment equal to the greater of (a) $100 per share and (b) an amount
equal to 100 times the liquidation payment made per share of Common Stock. Each
Series A Preferred Share will have 100 votes, voting together with the Common
Stock. In the event of any merger, consolidation, or other transaction in which
shares of Common Stock are exchanged, each Series A Preferred Share will be
entitled to receive 100 times the amount received per share of Common Stock.
These rights will be protected by customary antidilution provisions. Because of
the nature of the Series A Preferred Shares' dividend, voting and liquidation
rights, the value of the one one-hundredth interest in a Series A Preferred
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<PAGE>
Share purchasable upon exercise of each Right should approximate the value of
one share of Common Stock.
Rights may be exercised to purchase Series A Preferred Shares only after the
Rights Distribution Date occurs and prior to the occurrence of a Flip-in Event
or Flip-over Event. A Rights Distribution Date resulting from the commencement
of a tender offer or exchange offer described in clause (ii) of the definition
of "Rights Distribution Date" could precede the occurrence of a Flip-in Event or
Flip-over Event and thus result in the Rights being exercisable to purchase
Series A Preferred Shares. A Rights Distribution Date resulting from any
occurrence described in clause (i) or clause (iii) of the definition of "Rights
Distribution Date" would necessarily follow the occurrence of a Flip-in Event or
Flip-over Event and thus result in the Rights being exercisable to purchase
shares of Common Stock or other securities as described below.
In the event (a "Flip-in Event") that (i) any person, together with its
affiliates and associates, becomes the beneficial owner of 20% or more of the
outstanding Common Stock, (ii) any Acquiring Person merges into or combines with
Federated and Federated is the surviving corporation or any Acquiring Person
effects certain other transactions with Federated, as described in the Share
Purchase Rights Agreement, or (iii) during such time as there is an Acquiring
Person, there is any reclassification of securities or recapitalization or
reorganization of Federated which has the effect of increasing by more than 1%
the proportionate share of the outstanding shares of any class of equity
securities of Federated or any of its subsidiaries beneficially owned by the
Acquiring Person, proper provision will be made so that each holder of a Right,
other than Rights that are or were owned beneficially by the Acquiring Person
(which, from and after the later of the Rights Distribution Date and the date of
the earliest of any such events, will be void), will thereafter have the right
to receive upon exercise thereof at the then-current exercise price of the
Right, that number of shares of Common Stock (or, under certain circumstances,
an economically equivalent security or securities of Federated) that have a
market value of two times the exercise price of the Right.
In the event (a "Flip-over Event") that, following the first date of public
announcement by Federated that a person has become an Acquiring Person, (i)
Federated merges with or into any person and Federated is not the surviving
corporation, (ii) any person merges with or into Federated and Federated is the
surviving corporation, but all or part of the Common Stock is changed or
exchanged, or (iii) 50% or more of Federated's assets or earning power,
including without limitation securities creating obligations of Federated, are
sold, proper provision will be made so that each holder of a Right will
thereafter have the right to receive, upon the exercise thereof
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<PAGE>
at the then-current exercise price of the Right, that number of shares of common
stock (or, under certain circumstances, an economically equivalent security or
securities) of such other person which at the time of such transaction would
have a market value of two times the exercise price of the Right.
Following the occurrence of any Flip-in Event or Flip-over Event, Rights
(other than any Rights which have become void) may be exercised as described
above, upon payment of the exercise price or, at the option of the holder
thereof, without the payment of the exercise price that would otherwise be
payable. If a holder of Rights elects to exercise Rights without the payment of
the exercise price that would otherwise be payable, such holder will be entitled
to receive upon the exercise of such Rights securities having a market value
equal to the exercise price of the Rights. In addition, at any time after the
later of the Rights Distribution Date and the first occurrence of a Flip-in
Event or a Flip-over Event and prior to the acquisition by any person or group
of affiliated or associated persons of 50% or more of the outstanding Common
Stock, Federated may exchange the Rights (other than any Rights which have
become void), in whole or in part, at an exchange ratio of one share of Common
Stock per Right (subject to adjustment).
With certain exceptions, no adjustments in the Purchase Price will be
required until cumulative adjustments require an adjustment in the Purchase
Price of at least 1%. Federated is not required to issue fractional Series A
Preferred Shares (other than fractions that are integral multiples of one one-
hundredth of a Series A Preferred Share, which may, at the option of Federated,
be evidenced by depositary receipts) or fractional shares of Common Stock or
other securities issuable upon the exercise of Rights. In lieu of issuing such
securities, Federated may make a cash payment, as provided in the Share Purchase
Rights Agreement.
Federated may redeem the Rights in whole, but not in part, at a price of
$0.03 per Right, subject to adjustment and, in the event that the payment of
such amount would be prohibited by loan agreements or indentures to which
Federated is a party, deferral (the "Redemption Price"), at any time prior to
the close of business on the later of (i) the Rights Distribution Date and (ii)
the first date of public announcement that a person has become an Acquiring
Person. Immediately upon any redemption of the Rights, the right to exercise
the Rights will terminate and the holders will have only the right to receive
the Redemption Price.
The Share Purchase Rights Agreement may be amended by Federated without the
approval of any holders of Rights, including amendments which add other events
requiring adjustment to the Purchase Price payable and the number of
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<PAGE>
Series A Preferred Shares or other securities issuable upon the exercise of the
Rights which modify procedures relating to the redemption of the Rights,
provided that no amendment may be made which decreases the stated Redemption
Price to an amount less than $0.01 per Right, decreases the period of time
remaining until the Final Expiration Date, or modifies a time period relating to
when the Rights may be redeemed at such time as the Rights are not then
redeemable.
Certain Corporate Governance Matters
Federated's certificate of incorporation and by-laws provide that the
directors of Federated are to be classified into three classes, with the
directors in each class serving for three-year terms and until their successors
are elected. Any additional person elected to the Board of Directors of
Federated will be added to a particular class of directors to be determined at
the time of such election, although in accordance with Federated's certificate
of incorporation and by-laws, the number of directors in each class will be
identical or as nearly as practicable thereto based on the total number of
directors then serving as such.
Federated's by-laws provide that nominations for election of directors by the
stockholders will be made by the Board of Directors of Federated or by any
stockholder entitled to vote in the election of directors generally.
Federated's by-laws require that stockholders intending to nominate candidates
for election as directors deliver written notice thereof to the Secretary of
Federated not later than 60 calendar days in advance of the meeting of
stockholders; provided, however, that in the event that the date of the meeting
is not publicly announced by Federated by inclusion in a report filed with the
Commission or furnished to stockholders, or by mail, press release, or otherwise
more than 75 calendar days prior to the meeting, notice by the stockholder to be
timely must be delivered to the Secretary of Federated not later than the close
of business on the tenth day following the date on which such announcement of
the date of the meeting was so communicated. Federated's by-laws further
require that the notice by the stockholder set forth certain information
concerning such stockholder and the stockholder's nominees, including their
names and addresses, a representation that the stockholder is entitled to vote
at such meeting and intends to appear in person or by proxy at the meeting to
nominate the person or persons specified in the notice, a description of all
arrangements or understandings between the stockholders and each nominee, such
other information as would be required to be included in a proxy statement
soliciting proxies for the election of the nominees of such stockholder, and the
consent of each nominee to serve as a director of Federated if so elected. The
chairman of the meeting may refuse to acknowledge
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<PAGE>
the nomination of any person not made in compliance with these requirements.
In addition to the provisions relating to the classification of the Board of
Directors and the director nomination procedures described above, Federated's
certificate of incorporation and by-laws provide, in general, that (i) the
number of directors of Federated will be fixed, within a specified range, by a
majority of the total number of Federated's directors (assuming no vacancies) or
by the holders of at least 80% of Federated's voting stock, (ii) the directors
of Federated in office from time to time will fill any vacancy or newly created
directorship on the Board of Directors of Federated with any new director to
serve in the class of directors to which he or she is so elected, (iii)
directors of Federated may be removed only for cause by the holders of at least
80% of Federated's voting stock, (iv) stockholder action can be taken only at an
annual or special meeting of stockholders and not by written consent in lieu of
a meeting, (v) except as described below, special meetings of stockholders may
be called only by Federated's Chief Executive Officer or by a majority of the
total number of directors of Federated (assuming no vacancies) and the business
permitted to be conducted at any such meeting is limited to that brought before
the meeting by Federated's Chief Executive Officer or by a majority of the total
number of directors of Federated (assuming no vacancies), and (vi) subject to
certain exceptions, the Board of Directors of Federated may postpone and
reschedule any previously scheduled annual or special meeting of stockholders.
Federated's by-laws also require that stockholders desiring to bring any
business before an annual meeting of stockholders deliver written notice thereof
to the Secretary of Federated not later than 60 calendar days in advance of the
meeting of stockholders; provided, however, that in the event that the date of
the meeting is not publicly announced by Federated by press release or inclusion
in a report filed with the SEC or furnished to stockholders more than 75
calendar days prior to the meeting, notice by the stockholders to be timely must
be delivered to the Secretary of Federated not later than the close of business
on the tenth calendar day following the day on which such announcement of the
date of the meeting was so communicated. Federated's by-laws further require
that the notice by the stockholder set forth a description of the business to be
brought before the meeting and the reasons for conducting such business at the
meeting and certain information concerning the stockholder proposing such
business and the beneficial owner, if any, on whose behalf the proposal is made
including their names and addresses, the class and number of shares of
Federated, that are owned beneficially and of record by each of them, and any
material interest of either of them in the business proposed to be brought
before the meeting. Upon the written request of the holders of not less than
15% of Federated's voting stock, the
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Board of Directors of Federated will be required to call a meeting of
stockholders for the purpose specified in such written request and fix a record
date for the determination of stockholders entitled to notice of and to vote at
such meeting (which record date may not be later than 60 calendar days after the
date of receipt of notice of such meeting), provided that in the event that the
Board or Directors of Federated calls an annual or special meeting of
stockholders to be held not later than 90 calendar days after receipt of any
such written request, no separate special meeting of stockholders as so
requested will be required to be convened provided that the purposes of such
annual or special meeting called by the Board of Directors of Federated include
(among others) the purposes specified in such written request of the
stockholders.
Under applicable provisions of Delaware law, the approval of a Delaware
company's board of directors, in addition to stockholder approval, is required
to adopt any amendment to the company's certificate of incorporation, but a
company's by-laws may be amended either by action of its stockholders or, if the
company's certificate of incorporation so provides, its board of directors.
Federated's certificate of incorporation and by-laws provide that (i) except as
described below, the provisions summarized above and the provisions relating to
the classification of the Board and nominating procedures may not be amended by
the stockholders, nor may any provision inconsistent therewith be adopted by the
stockholders, without the affirmative vote of the holders of at least 80% of
Federated's voting stock, voting together as single class, except that if any
such action (other than any direct or indirect amendments to the provision
requiring that stockholder action be taken at a meeting of stockholders rather
than by written consent in lieu of a meeting) is approved by the holders of a
majority, but less than 80%, of the then-outstanding voting stock (in addition
to any other approvals require by law, including approval by the Board of
Directors of Federated with respect to any amendment to Federated's certificate
of incorporation), such action will be effective as of one year from the date of
adoption, or (ii) Federated's by-law provisions relating to the right of
stockholders to cause special meetings of stockholders to be called and to the
composition of certain directorate committees may not be amended by the Board
without stockholder approval.
Federated is subject to Section 203 of the DGCL, which restricts the
consummation of certain business combination transactions in certain
circumstances. In addition, Federated's certificate of incorporation contains
provisions that are substantially similar to those contained in Section 203 of
the DGCL that restrict business combination transactions with (i) any person or
group that became or is deemed to have become the beneficial owner of 15% or
more of the voting stock of Federated as a result of its receipt of Common Stock
or
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warrants pursuant to the plan of reorganization that thereafter becomes the
beneficial owner of an additional 1% or more of the voting stock of Federated
and (ii) any other person or group that becomes the beneficial owner of 15% more
of the voting stock of Federated.
The foregoing provisions of Federated's certificate of incorporation, the
provisions of its by-laws relating to advance notice of stockholder nominations,
and the provisions of the Share Purchase Rights Agreement (see "--Preferred
Share Purchase Rights") may discourage or make more difficult the acquisition of
control of Federated by means of a tender offer, open market purchase, proxy
contest, or otherwise. These provisions are intended to discourage or may have
the effect of discouraging certain types of coercive takeover practices and
inadequate takeover bids and to encourage persons seeking to acquire control of
Federated first to negotiate with Federated. Federated's management believes
that the foregoing measures, many of which are substantially similar to the
takeover-related measures in effect for many other publicly held companies,
provide benefits by enhancing Federated's potential ability to negotiate with
the proponent of an unfriendly or unsolicited proposal to take over or
restructure Federated that outweigh the disadvantages of discouraging such
proposals because, among other things, negotiation of such proposals could
result in an improvement of their terms.
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Item 7. Financial Statements, Pro Forma Financial
-----------------------------------------
Information and Exhibits.
-------------------------
The following exhibits are filed herewith:
12 Statement of Computation of Ratios
23.1 Consent of Price Waterhouse LLP
23.2 Consent of Deloitte & Touche LLP
99.1 (i) Consolidated financial statements of Broadway as of January 28, 1995
and January 29, 1994 and for each of the two fiscal years ended January
28, 1995, the 17 weeks ended January 30, 1993 and the 35 weeks ended
October 3, 1992 and (ii) unaudited consolidated financial statements
of Broadway as of July 29, 1995 and for the 26 weeks ended July 29, 1995
99.2 (i) Consolidated financial statements of Macy's as of July 30, 1994 and
July 31, 1993 and for each of the fiscal years ended July 30, 1994, July
31, 1993, and August 1, 1992 and (ii) unaudited consolidated financial
statements of Macy's as of October 29, 1994 and for the 13 weeks ended
October 29, 1994
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FEDERATED DEPARTMENT STORES, INC.
Date: September 21, 1995 By: /s/ Dennis J. Broderick
---------------------------
Dennis J. Broderick
Senior Vice President,
General Counsel and
Secretary
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EXHIBIT INDEX
-------------
Exhibit
Number Description Page
------ ----------- ----
12 Statement of Computation of Ratio
23.1 Consent of Price Waterhouse LLP
23.2 Consent of Deloitte & Touche LLP
99.1 (i) Consolidated financial statements of
Broadway as of January 28, 1995 and
January 29, 1994 and for each of the two fiscal
years ended January 28, 1995, the 17 weeks
ended January 30, 1993, and the 35 weeks
ended October 3, 1992 and (ii) unaudited
consolidated financial statements of Broadway
as of July 29, 1995 and for the 26 weeks ended
July 29, 1995
99.2 (i) Consolidated financial statements of Macy's
as of July 30, 1994 and July 31, 1993
and for each of the fiscal years ended July
30, 1994, July 31, 1993, and August 1, 1992
and (ii) unaudited consolidated financial
statements of Macy's as of October 29, 1994 and
for the 13 weeks ended October 29, 1994
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<TABLE><CAPTION>
FEDERATED DEPARTMENT STORES, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES(a)
(in thousands, except ratio data)
For the 26 Weeks Ended July 29, 1995 For the 52 Weeks Ended January 28, 1995
------------------------------------ -----------------------------------------------
Historical Historical Proforma Historical
----------------------
Federated Broadway Pro Forma Federated Federated Broadway Pro Forma
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Income (loss) before income taxes $ (188,121) $ (80,746) $(266,508) $ 331,284 $ 167,756 $ (37,210) $ 163,329
Add: Portion of rents representative
of the interest factor 64,169 8,950 73,595 71,109 128,338 18,850 147,188
Interest expense 223,558 62,499 264,524 262,115 465,217 100,904 526,296
---------- ---------- --------- --------- --------- --------- ---------
Adjusted income (loss) $ 99,606 $ (9,297) $ 71,611 $ 664,508 $ 761,311 $ 82,544 $ 836,813
---------- ---------- --------- --------- --------- --------- ---------
---------- ---------- --------- --------- --------- --------- ---------
Fixed charges:
Interest expense $ 223,558 $ 62,449 $ 264,524 $ 262,115 $ 465,217 $ 100,904 $ 526,296
Capitalized interest 686 514 1,200 447 447 2,812 3,259
Portion of rents representative
of the interest factor 64,169 8,950 73,595 71,109 128,338 18,850 147,188
---------- ---------- --------- --------- --------- --------- ---------
Total fixed charges $ 288,413 $ 71,963 $ 339,319 $ 333,671 $ 594,002 $ 122,566 $ 676,743
---------- ---------- --------- --------- --------- --------- ---------
---------- ---------- --------- --------- --------- --------- ---------
Ratio of earnings to fixed charges - - - 1.99 x 1.28 x - 1.24 x
Deficiency of earnings to fixed charges $ 188,807 $ 81,260 $ 267,708 - - $ 40,022 -
-------------------------
(a) For the purposes of determining the ratio or deficiency of earnings to fixed charges, earnings consist of income before taxes
plus fixed charges (excluding interest capitalized). Fixed charges represent interest incurred, amortization of debt
expense, and that portion of rental expense on operating leases deemed to be equivalent of interest.
</TABLE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus Supplement
to the Prospectus constituting part of Amendment No. 1 the Registration
Statement on Form S-3 (No.33-59691) of Federated Department Stores, Inc. of our
reports dated March 13, 1995 and March 12, 1993 relating to the consolidated
financial statements of Broadway Stores, Inc. and its subsidiaries as of January
28, 1995 and January 29, 1994 and the fiscal years ended January 28, 1995 and
January 29, 1994, the seventeen weeks ended January 30, 1993, and the
thirty-five weeks ended October 3, 1992, which appear in the Current Report on
Form 8-K of Federated Department Stores, Inc. dated September 21, 1995. We also
consent to the reference to us under the heading "Experts" in such Prospectus
Supplement.
Price Waterhouse LLP
Los Angeles, California
September 21, 1995
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-59691 of Federated Department Stores, Inc. on Form S-3 of our report
dated September 19, 1994 (September 28, 29 and 30, 1994 as to Notes 18,
2 and 20 respectively) on the consolidated financial statements of
R.H. Macy & Co., Inc. for the three years in the period ended July 30,
1994, which expresses an unqualified opinion and includes explanatory paragraphs
relating to the Company's reorganization proceedings, its ability to continue
as a going concern and its method of accounting for income taxes and
postretirement benefits other than pension, appearing in the Annual Report
on Form 10-K of R.H. Macy & Co., Inc. for the year ended July 30, 1994, which
consolidated financial statements are attached as an Exhibit to the Current
Report on Form 8-K of Federated Department Stores, Inc. dated September 21,
1995, and to the reference to us under the heading "Experts" in the
Post-Effective Prospectus Supplement to be filed pursuant to Rule 424(b),
which is part of such Registration Statement.
/s/ Deloitte & Touche LLP
New York, New York
September 20, 1995
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Broadway Stores, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of earnings, of cash flows and of shareholders' equity
present fairly, in all material respects, the financial position of Broadway
Stores, Inc. (formerly known as Carter Hawley Hale Stores, Inc.) and its
subsidiaries at January 28, 1995 and January 29, 1994, and the results of their
operations and their cash flows for the fiscal years ended January 28, 1995 and
January 29, 1994 and the seventeen weeks ended January 30, 1993, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
Our audits of the consolidated financial statements referred to above also
included an audit of the accompanying Financial Statement Schedule VIII for
the fiscal years ended January 29, 1995 and January 28, 1994 and the
seventeen weeks ended January 30, 1993. In our opinion, this Financial
Statement Schedule presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements.
As discussed in the Reorganization and Basis of Reporting section of the Summary
of Significant Accounting Policies, on September 14, 1992, the United States
Bankruptcy Court confirmed the Company's plan of reorganization. The plan of
reorganization, which was effective October 8, 1992, resulted in the discharge
of all claims against the Company which arose prior to February 11, 1991 and
substantially altered the rights and interests of the existing equity security
holders. The Company utilized fresh start reporting as of October 3, 1992 to
account for the effects of the reorganization.
Price Waterhouse LLP
Los Angeles, California
March 13, 1995
1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Broadway Stores, Inc.
In our opinion, the accompanying consolidated statements of earnings, of cash
flows and of shareholders' equity present fairly, in all material respects, the
results of operations and cash flows of Broadway Stores, Inc. (formerly known as
Carter Hawley Hale Stores, Inc.) and its subsidiaries for the thirty-five weeks
ended October 3, 1992, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for the
opinion expressed above.
Our audit of the consolidated financial statements referred to above also
included an audit of the accompanying Financial Statement Schedule VIII for
the thirty-five weeks ended October 3, 1992. In our opinion, this Financial
Statement Schedule presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements.
As discussed in the Reorganization and Basis of Reporting section of the Summary
of Significant Accounting Policies, on February 11, 1991, the Company filed a
petition with the United States Bankruptcy Court for reorganization under
Chapter 11 of the Bankruptcy code. The plan of reorganization was effective
October 8, 1992, at which time the Company emerged from bankruptcy. The Company
utilized fresh start reporting as of October 3, 1992 to account for the effects
of the reorganization.
As discussed in the Change in Accounting Policy section of the Summary of
Significant Accounting Policies, the Company changed its method of accounting
for income taxes in the thirty-five week period ended October 3, 1992.
Price Waterhouse LLP
Los Angeles, California
March 12, 1993
2
<PAGE>
BROADWAY STORES, INC.
Consolidated Statement of Earnings
<TABLE>
<CAPTION>
Year Ended Period Ended
-------------------------- ---------------------------
January 28, January 29, January 30, October 3,
1995 1994 1993 1992
(In thousands, except per share amounts) (52 weeks) (52 weeks) (17 weeks) (35 weeks)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales $2,086,804 $2,092,681 $889,843 $1,248,004
Finance charge revenue 91,330 81,438 27,265 55,377
Cost of goods sold, including
occupancy and buying costs 1,560,035 1,589,077 641,361 946,618
Selling, general and administrative
expenses 554,405 551,098 206,804 354,806
Charge for non-recurring costs 45,000
---------- ---------- -------- ----------
Earnings (loss) from operations before
interest expense, reorganization
income and income taxes 63,694 (11,056) 68,943 1,957
Interest expense, net 100,904 84,864 29,623 60,185
---------- ---------- -------- ----------
Earnings (loss) from operations
before reorganization income
(costs) and income taxes (37,210) (95,920) 39,320 (58,228)
Reorganization income 884,131
---------- ---------- -------- ----------
Earnings (loss) from operations
before income taxes (37,210) (95,920) 39,320 825,903
Income tax benefit (expense) (150) (16,600) 6,800
---------- ---------- -------- ----------
Earnings (loss) before extraordinary
item and cumulative effect of
change in accounting (37,360) (95,920) 22,720 832,703
Extraordinary gain on debt discharge 304,388
Cumulative effect of change in accounting
for income taxes 18,832
---------- ---------- -------- ----------
Net earnings (loss) $ (37,360) $ (95,920) $ 22,720 $1,155,923
========== ========== ======== ==========
Earnings (loss) per common share $ (.80) $ (2.30) $ .65
========== ========== ========
</TABLE>
See accompanying Summary of Significant Accounting Policies and Financial
Review.
3
<PAGE>
BROADWAY STORES, INC.
Consolidated Balance Sheet
<TABLE>
<CAPTION>
January 28, January 29,
(In thousands) 1995 1994
--------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets
Cash $ 18,318 $ 18,192
Accounts receivable, net 664,825 627,374
Merchandise inventories 504,522 427,631
Other current assets 11,613 9,799
---------- ----------
1,199,278 1,082,996
Property and equipment, net 888,258 810,608
Other assets 39,540 40,543
---------- ----------
$2,127,076 $1,934,147
========== ==========
Liabilities and Shareholders' Equity
Current liabilities
Notes payable and current
installments $ 18,490 $ 3,459
Accounts payable 175,622 151,687
Accrued expenses 141,027 186,837
Current income taxes 1,002 1,203
---------- ----------
336,141 343,186
Receivables based financing 573,138 332,182
Other secured long-term debt 522,517 517,287
Convertible senior subordinated notes 143,750 143,750
Capital lease obligations 41,524 44,667
Other liabilities 109,504 124,508
Deferred income taxes 14,850 14,850
Shareholders' equity
Preferred stock, $.01 par value 8 9
Common stock, $.01 par value 469 468
Other paid-in capital 502,039 500,785
Total accumulated deficit (116,864) (87,545)
---------- ----------
385,652 413,717
---------- ----------
$2,127,076 $1,934,147
========== ==========
</TABLE>
See accompanying Summary of Significant Accounting Policies and Financial
Review.
4
<PAGE>
BROADWAY STORES, INC.
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Year Ended Period Ended
-------------------------- -----------------------
January 28, January 29, January 30, October 3,
1995 1994 1993 1992
(In thousands) (52 weeks) (52 weeks) (17 weeks) (35 weeks)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating activities
Earnings (loss) from operations $ (37,360) $ (95,920) $ 22,720 $ 832,703
Adjustments to reconcile earnings (loss) from
operations to net operating cash flows
Fresh-start adjustment (906,373)
Depreciation and amortization 42,951 33,987 10,617 27,923
Stock compensation 1,401
Deferred income taxes 2,400 16,450
Change in operating assets and liabilities
Restricted cash 47,954 (47,954)
Customer receivables, net (55,829) 2,158 (88,217) 105,040
Merchandise inventories (76,891) 40,078 43,715 (79,476)
Accounts payable and accrued expenses 35,247 (7,590) (64,157) 59,309
Other, net (48,753) (10,455) (4,989) 14,359
--------- --------- -------- ---------
Net cash provided (used) by operating activities (140,635) (35,342) (14,506) 5,531
--------- --------- -------- ---------
Investing activities
Proceeds from sales of property and
equipment 6,468
Purchases of property and equipment (109,726) (59,957) (21,190) (17,052)
--------- --------- -------- ---------
Net cash used by investing activities (109,726) (53,489) (21,190) (17,052)
--------- --------- -------- ---------
Financing activities
Net change in financing under receivables
based facilities 240,956 (135,395) 79,271 (100,948)
Net change in financing under working
capital facilities 11,740 (52,315) (38,485) 53,800
Retirements of long-term debt and
capital lease obligations (3,463) (16,855) (2,739) (1,929)
Costs relating to early retirements of long-term
debt, net of items not requiring cash outlay (10,652)
Issuance of convertible subordinated notes 143,750
Issuances of common stock 1,254 149,221 50,000
--------- --------- -------- ---------
Net cash provided (used) by financing activities 250,487 88,406 38,047 (9,729)
--------- --------- -------- ---------
Net increase (decrease) in cash 126 (425) 2,351 (21,250)
Cash at the beginning of the period 18,192 18,617 16,266 37,516
--------- --------- -------- ---------
Cash at the end of the period $ 18,318 $ 18,192 $ 18,617 $ 16,266
========= ========= ======== =========
</TABLE>
See accompanying Summary of Significant Accounting Policies and Financial
Review.
5
<PAGE>
BROADWAY STORES, INC.
Consolidated Statement of Shareholders' Equity
<TABLE>
<CAPTION>
Total Accumulated
Earnings (Deficit)
Shares Issued Par Value ---------------------------
------------------ ------------------- Accumulated
Warrants Other Paid- SFAS 87 Earnings
(In thousands) Issued Preferred Common Preferred Common in Capital Adjustment (Deficit)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, February 1, 1992 30,349 $ $ 303 $ 643,194 $ (23,111) $(1,128,862)
Net earnings 1,155,923
Net cancellations of
common stock under the
stock incentive plan (868) (9)
Adjustment to additional
minimum pension liability 23,111 (27,061)
Reorganization Plan
transactions:
Existing equity holders:
Cancellation of existing
common stock outstanding (29,481) (294) (643,194)
Issuance of new
common stock together
with warrants or
preferred stock 1,333 1,143 2,386 11 24 23,965
Issuance of new common
stock to holders of
liabilities subject to
settlement 27,600 276 275,724
Additional equity
investment 5,000 50 49,950
----- ----- ------- ------ ------- --------- ---------- -----------
Balance, October 3, 1992 1,333 1,143 34,986 11 350 349,639
Net earnings 22,720
Issuances of new common
stock 214 2 2,039
Conversions of preferred
stock 41 (41)
----- ----- ------- ------ ------- --------- ---------- -----------
Balance, January 30, 1993 1,374 1,102 35,200 11 352 351,678 22,720
Net loss (95,920)
Issuances of new common
stock 11,450 114 147,432
Conversion of preferred
stock 160 (160) (2) 2
Exercise of stock options 164 2 1,673
Adjustment to additional
minimum pension liability (14,345)
----- ----- ------- ------ ------- --------- ---------- -----------
Balance, January 29, 1994 1,534 942 46,814 9 468 500,785 (14,345) (73,200)
Net loss (37,360)
Issuances of new common
stock 44 411
Conversion of preferred
stock 96 (96) (1) 1
Exercise of stock options 83 1 842
Adjustment to additional
minimum pension liability 8,041
----- ----- ------- ------ ------- --------- ---------- -----------
Balance, January 28, 1995 1,630 846 46,941 $ 8 $ 469 $ 502,039 $ (6,304) $ (110,560)
===== ===== ======= ====== ======= ========= ========== ===========
</TABLE>
See accompanying Summary of Significant Accounting Policies and Financial
Review.
6
<PAGE>
BROADWAY STORES, INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reorganization
On February 11, 1991 (the "Petition Date"), the Company filed a petition (the
"Filing") for relief under Chapter 11 of the Bankruptcy Code in the United
States Bankruptcy Court for the Central District of California (the "Bankruptcy
Court"). The Company subsequently managed its affairs and operated its business
under Chapter 11 as a debtor-in-possession while a plan of reorganization was
formulated.
On July 28, 1992, the Company's plan of reorganization ("POR"), which was
supported by the largest secured and unsecured creditors and the official
committee of the equity security holders, was filed with the Bankruptcy Court.
The POR was subsequently confirmed at the Bankruptcy Court hearing held on
September 14, 1992 and became effective October 8, 1992 (the "Emergence Date").
The POR provided for the conversion of substantially all unsecured claims
into 27.6 million shares of Common Stock, the conversion of all common stock
outstanding immediately prior to the Emergence Date ("Old Common Stock") into
2.4 million shares of newly-issued common stock of the Company ("Common Stock")
and a combined total of 2.5 million of convertible warrants or shares of
preferred stock, and the conversion of accrued interest under certain secured
debt agreements into secured long-term obligations in accordance with the
related settlement agreements.
Pursuant to the POR, Zell/Chilmark Fund, L.P. ("Zell/Chilmark"), the
Company's largest unsecured creditor, received 21.2 million shares of Common
Stock in settlement of approximately $461.0 million of unsecured claims on the
Emergence Date. In addition, pursuant to the terms of the Postpetition Store
Modernization Facility Conversion Agreement (the "Conversion Agreement"),
Zell/Chilmark and an institutional investor each acquired an additional 2.5
million shares of Common Stock at a price of $10.00 per share. As of the
Emergence Date, 32.4 million shares of Common Stock were issued pursuant to the
POR and the Conversion Agreement, of which Zell/Chilmark owned 73.2 percent. As
of January 28, 1995 Zell/Chilmark owned approximately 53.9% of the Company's
outstanding Common Stock.
Basis of Reporting
The financial statements for the 35 week period ended October 3, 1992 (the
"Effective Date") reflect the Company's emergence from Chapter 11 and were
prepared utilizing the principles of fresh-start reporting contained in American
Institute of Certified Public Accountants' Statement of Position 90-7 "Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code" (the
"Reorganization Statement").
Operations during the period from October 3, 1992 through the Emergence Date
had no significant impact on the emergence transactions and as a result have not
been separately identified. The financial statements for periods subsequent to
October 3, 1992 have been segregated from those for prior periods by a solid
double line to reflect the significant change in reporting entity resulting from
the application of fresh start reporting.
Fiscal Year
The Company's fiscal year ends on the Saturday closest to January 31.
7
<PAGE>
Change in Accounting Policy
During 1992, the Company adopted Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). Prior to the adoption
of SFAS No. 109, the Company accounted for income taxes under Statement of
Financial Accounting Standards No. 96 ("SFAS No. 96"). Both SFAS No. 109 and
SFAS No. 96 require the use of the liability method of accounting for income
taxes and require the adjustment of previously recorded deferred tax liabilities
and assets for the effects of changes in tax laws or rates through the date of
the latest financial statements presented. SFAS No. 109 changed the criteria for
recognition and measurement of deferred tax assets and allowed the Company to
recognize certain benefits resulting from net operating loss carryforwards for
which no benefit could be recognized under SFAS 96. The cumulative effect of the
change on prior years was a gain of $18.8 million, which has been reflected in
net earnings for the first quarter of 1992.
Sales
Sales are net of returns, exclude sales tax, and comprise sales of
merchandise, services, and leased departments. Leased department sales were
$116.5 million in 1994, $210.7 million in 1993, $88.5 million for the seventeen
week period ended January 30, 1993, and $139.3 million for the thirty-five week
period ended October 3, 1992. In May 1994, the leased shoe department was
converted from a third party operation into an owned department.
Customer Accounts Receivable
An account is generally written-off when the aggregate of payments made in
the most recent six months is less than one full monthly scheduled payment, or
when it is otherwise determined that the account is uncollectible.
Inventories
Merchandise inventories are valued at the lower of cost or market, as
determined by the retail method on the last-in, first-out ("LIFO") basis. For
periods subsequent to the Effective Date, the Company utilized internally
developed inflation indices in the computation of LIFO inventories. Prior to
the Effective Date, the Company utilized the inflation indices published by the
Bureau of Labor Statistics.
Property and Equipment
Property and equipment additions are recorded at cost and include major
renewals and improvements which significantly add to productive capacity or
extend the useful life of an asset. Maintenance and repairs are expensed.
Depreciation and Amortization
Depreciation and amortization are calculated on a straight-line basis over
the estimated useful lives of the property and equipment, or over the terms of
the related leases, if shorter. Debt acquisition costs are amortized over the
life of the related debt.
Advertising and Promotional Costs
Advertising and promotional costs are generally expensed as incurred except
for certain costs which are deferred over the term of the promotion, generally
three months or less. Advertising costs charged to expense were $72.5 million
in fiscal 1994, $71.7 million in fiscal 1993, $31.6 million for the seventeen
week period ended January 30, 1993 and $47.9 million for the thirty-five week
period ended October 3, 1992.
8
<PAGE>
Income Taxes
Income taxes are recorded in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" which requires the
recognition of a deferred tax liability for taxable temporary differences and a
deferred tax asset for deductible temporary differences. A valuation allowance
is established when, based on the weight of available evidence, it appears more
likely than not that some portion or all of the deferred tax assets will not be
realized.
Earnings Per Share of Common Stock
Earnings per share are computed on the basis of the weighted average number
of shares outstanding during the period, including dilutive stock options and
all 35.0 million shares of Common Stock expected to be issued in accordance with
the POR. As of January 28, 1995, 1.0 million shares remain to be issued in
accordance with the POR. Per share data for periods prior to October 3, 1992
have been omitted as these amounts do not reflect the current capital structure.
9
<PAGE>
FINANCIAL REVIEW
Non-recurring Costs
A significant number of the Company's Southern California stores suffered
damage as a result of the major earthquake which affected that area on January
17, 1994. While most of the area stores were reopened within two weeks, four
stores suffered extensive damage and were closed for repairs for periods of 4 to
10 months. The Company maintains earthquake and business interruption insurance
with standard deductible provisions that require the Company to incur an initial
level of costs at each location subject to damage or interruption of business.
In January 1994, the company established a reserve of $65.4 million to cover
costs of building and fixture repairs, inventory and business interruption
losses, and other costs related to the earthquake. As of January 29, 1994,
$17.1 million of the reserve had been utilized with the remainder being utilized
during fiscal 1994. In addition, a $50.4 million receivable was established for
estimated insurance recoveries resulting in a $15.0 million non-recurring charge
being recognized in 1993 for earthquake related losses in excess of estimated
insurance proceeds. During 1994, $35.4 million in insurance payments have been
received and an additional receivable of $10.0 million was established at year-
end for anticipated recoveries for additional capital expenditures. The reserve
utilization and insurance proceeds received are reflected in the Consolidated
Statements of Cash Flows and are included as other net changes in operating
assets and liabilities. The $15.0 non-recurring charge recognized in January
1994, in management's opinion, continues to be adequate to cover earthquake
losses in excess of estimated insurance proceeds.
During 1993, the Company recorded $30.0 million in non-recurring charges
associated with one-time costs incurred in the implementation of the strategic
plan to streamline the Company. The charge comprised severance and other
benefit costs incurred from staff reductions, related consulting fees, and the
costs of implementing other efficiencies under the plan.
Reorganization Income and Costs
In accordance with the Reorganization Statement, income and costs directly
related to the reorganization have been segregated and are separately disclosed.
The major components are as follows:
<TABLE>
<CAPTION>
Period Ended
--------------
October 3, 1992
(In millions) (35 Weeks)
- ------------------------------------------------------------
<S> <C>
Adjustments to fair value $906.4
Provision for settlement of disputed claims (8.5)
Professional fees and other expenditures
directly related to the Filing (13.8)
------
$884.1
======
</TABLE>
The adjustments to fair value reflected the effects of the revaluation of
assets and liabilities in accordance with the Reorganization Statement. These
adjustments included the $283.4 million write-up of fixed assets, the net
increase of $3.5 million in other balance sheet items and the elimination of the
remaining $619.5 million accumulated deficit in shareholders' equity.
The provision for settlement of disputed claims represented management's
estimate of the net amount required to cover all outstanding disputed claims
included in liabilities subject to settlement based on facts and circumstances
at that time.
10
<PAGE>
Gain on Debt Discharge
The gain on debt discharge reflected the conversion of $600.0 million of
liabilities subject to settlement into $276.0 million of shareholders' equity
resulting in a $324.0 million gain. The gain is presented net of write-offs and
costs associated with the repayment of borrowings on the Effective Date.
Interest Expense, Net
The components of interest expense are as follows:
<TABLE>
<CAPTION>
Year Ended Period Ended
------------------------- ------------------------
January 28, January 29, January 30, October 3,
1995 1994 1993 1992
(In millions) (52 weeks) (52 weeks) (17 weeks) (35 weeks)
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest on total debt $ 86.2 $71.3 $24.9 $54.1
Imputed interest on capitalized
lease obligations 4.2 4.4 1.6 3.4
Capitalized interest (2.8) (1.4) (.5) (.4)
Amortization of debt
issuance costs 10.9 8.3 2.6 4.3
Commitment fees 1.6 1.5 .8
Other .8 .8 .2 (1.2)
------ ----- ----- -----
Interest expense, net $100.9 $84.9 $29.6 $60.2
====== ===== ===== =====
</TABLE>
Interest payments, net of amounts capitalized, were $58.9 in 1994, $63.8
million in 1993, $34.0 million in the seventeen week period ended January 30,
1993, and $32.8 million in the thirty-five week period ended October 3, 1992.
As a result of the Filing, interest payments during bankruptcy were limited
to amounts due under the Post-petition Credit Agreement, the Interim Receivables
Facility (during its existence), the Post-petition Receivables Securitization
Facility, and the interest element of capital lease payments made. During
bankruptcy, interest continued to accrue on the Company's secured mortgage debt
but no payments were made. Both the accrual of interest and amortization of
debt issuance costs on the Company's subordinated debt ceased at the Filing.
Unaccrued interest on the subordinated debt amounted to $29.2 million in the
thirty-five weeks ended October 3, 1992. In accordance with the POR, the
liability for such unaccrued interest was cancelled with no payment due.
Commitment fees totalling $1.8 million in the thirty-five week period ended
October 3, 1992 were included in selling, general and administrative expenses.
Such fees are reported as a component of interest expense for periods subsequent
to the Effective Date.
11
<PAGE>
Income Taxes
The $.2 million tax provision for the current year ended January 28, 1995
reflects state franchise taxes not measured by or based upon income. The tax
effect of the current year loss was offset by an addition to the SFAS 109
valuation allowance and, accordingly, no income tax provision was recorded.
Similarly, no income tax provision was recognized for the year ended January 29,
1994.
Income taxes for 1992 were required to be separately computed for the pre-
and post-reorganization periods. The $6.8 million tax benefit recognized for
the thirty-five week period ended October 3, 1992 reflects the reversal of
certain tax reserves on favorable resolution of income tax audits for tax years
through July 1990.
<TABLE>
<CAPTION>
Year Ended Period Ended
------------------------ ------------------------
January 28, January 29, January 30, October 3,
1995 1994 1993 1992
(In millions) (52 weeks) (52 weeks) (17 weeks) (35 weeks)
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Current
Federal $ $ $ $ (6.8)
State .2 .1
---------- ----------- ----------- ----------
.2 -- .1 (6.8)
---------- ----------- ----------- ----------
Deferred
Federal (2.6) 11.6
State 2.6 4.9
---------- ----------- ----------- ----------
-- -- 16.5 --
---------- ----------- ----------- ----------
Income tax expense (benefit) $ .2 $ -- $ 16.6 $ (6.8)
========== =========== =========== ==========
</TABLE>
The limited ability to utilize net operating loss carryforwards in certain
periods is reflected in the following analysis of the effective income tax rate
reconciliation and in the composition of deferred income tax liability.
<TABLE>
<CAPTION>
Year Ended Period Ended
------------------------ ------------------------
January 28, January 29, January 30, October 3,
1995 1994 1993 1992
(Percent of pre-tax earnings) (52 weeks) (52 weeks) (17 weeks) (35 weeks)
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal income tax at
statutory rate (35.0)% (35.0)% 34.0% (34.0)%
State income taxes 2.7 8.4
Losses for which no benefit
is recognized 35.0 32.3 34.0
Adjustments to taxes
previously recorded (.8)
Other, net .4 (.2)
---------- ----------- ----------- ----------
Effective income tax rate .4% --% 42.2% (.8)%
========== =========== =========== ==========
</TABLE>
12
<PAGE>
In the following table of components of the net deferred tax liability,
adjustments to the valuation allowance offset the benefits related to losses
from operations.
<TABLE>
<CAPTION>
January 28, January 29,
(In millions) 1995 1994
- --------------------------------------------------------------------
<S> <C> <C>
Employee benefits $ 54.2 $ 60.7
Unscheduled claims 3.8 4.9
Short-period loss 6.4 8.5
Accounts receivable 8.4 7.6
Restructuring reserves 1.0 5.0
Earthquake 17.9 3.4
Loss carryforwards 210.3 165.9
Credit carryforwards 11.5 7.9
Other 7.1 8.2
------- -------
Gross deferred tax asset 320.6 272.1
------- -------
Property and equipment (218.9) (194.7)
Inventories (51.4) (36.8)
Other (9.2) (9.6)
------- -------
Gross deferred tax liability (279.5) (241.1)
SFAS 109 valuation allowance (56.0) (45.9)
------- -------
Net deferred tax liability $ (14.9) $ (14.9)
======= ========
</TABLE>
The estimated federal and California net operating loss carryforwards of
$619.0 million and $261.0 million, respectively, expire in years 2004 through
2009, and 1996 through 2002. As of the bankruptcy Emergence Date, the Company
experienced a change of ownership which may have the effect of restricting the
Company's ability to utilize losses. The California net operating loss
carryforward period was legislatively reduced to five years effective for losses
generated in and subsequent to 1993. This change may further restrict the
Company's ability to utilize its loss carryforwards.
The federal and California credit carryforwards of $3.6 million and $6.9
million, respectively, expire in years 2002 through 2005, and 2007 through 2009.
The federal alternative minimum tax credit carryforward of $1.0 million carries
over indefinitely.
Tax payments were $.4 million in 1994, $.2 million in 1993, $.2 million and
$.1 million in the seventeen and thirty-five week periods comprising the fifty-
two week period ended January 30, 1993.
13
<PAGE>
Accounts Receivable and Credit Operations
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
January 28, January 29,
(In millions) 1995 1994
- -----------------------------------------------------------------
<S> <C> <C>
Customer receivables $635.9 $578.3
Other receivables 47.9 66.3
------ ------
683.8 644.6
Less allowance for doubtful accounts (19.0) (17.2)
------ ------
Accounts receivable, net $664.8 $627.4
====== ======
</TABLE>
Other receivables included estimated earthquake insurance recoveries of $25.0
million as of January 28, 1995 and $50.4 million as of January 29, 1994.
Selected credit operations information is as follows:
<TABLE>
<CAPTION>
Year Ended Period Ended
------------------------- ------------------------
January 28, January 29, January 30, October 3,
1995 1994 1993 1992
(52 weeks) (52 weeks) (17 weeks) (35 weeks)
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Credit sales as a percent of
gross sales 49.0% 51.7% 52.7% 52.0%
Uncollectible account losses,
net of recoveries, as a
percent of credit sales 2.2% 2.5% 2.2% 3.6%
</TABLE>
The Company's proprietary credit card penetration has eroded 3.0% from 52.0%
of gross sales in the thirty-five week period ended October 3, 1992 to 49.0% in
the current year. In part, this reflects the impact of the Company's
approximately 85% sales concentration in California which continues to
experience economic weakness, resulting in lower levels of consumer confidence
and decreased total credit sales. In addition, it reflects the wider use of
third party bank cards. Current year write-offs at 2.2% of credit sales
improved from 2.5% for the fifty-two week period ended January 29, 1994
reflecting improved collections and the effect of easing minimum payment
requirements. Since the decline in write-offs is partially attributable to the
temporary favorable impact of reduced minimum payments, the allowance for
doubtful accounts continues to be carried at 3.0% of customer receivables
outstanding.
Inventories
The LIFO method of accounting resulted in a credit to cost of goods sold of
$3.5 million in the current year compared to credits of $8.9 million in 1993 and
$1.9 million for the seventeen weeks ended January 30, 1993 and a charge of $7.1
million for the thirty-five weeks ended October 3, 1992. If all inventories had
been valued on the first-in, first-out ("FIFO") basis, they would have been
lower at each period end by $14.3 million at January 28, 1995, $10.8 million at
January 29, 1994 and $1.9 million at January 30, 1993.
In accordance with the principles of fresh start reporting, merchandise
inventories at October 3, 1992 were restated at fair market value, resulting in
elimination of the LIFO reserve at that date.
Leases
Certain Company operations are conducted in leased properties, which include
retail stores, distribution centers, and office facilities. Leases are
generally for periods of up to thirty years, with renewal options for
substantial periods. Leases are generally at fixed rental rates, except that
certain leases provide for additional rental charges based on sales in excess of
predetermined levels.
14
<PAGE>
Rent expense for each period is as follows:
<TABLE>
<CAPTION>
Year Ended Period Ended
------------------------- ------------------------
January 28, January 29, January 30, October 3,
1995 1994 1993 1992
(In millions) (52 weeks) (52 weeks) (17 weeks) (35 weeks)
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Minimum rent $21.1 $21.4 $ 8.2 $18.0
Rent based on sales .6 .7 .4 .4
----- ----- ----- -----
Total rent expense $21.7 $22.1 $ 8.6 $18.4
===== ===== ===== =====
</TABLE>
The following table shows the future minimum obligations under leased
commitments in effect at January 28, 1995:
<TABLE>
<CAPTION>
Capitalized Operating
(In millions) Leases Leases
- --------------------------------------------------------------------------
<S> <C> <C>
1995 $ 7.1 $ 22.8
1996 6.9 23.1
1997 6.9 24.8
1998 6.6 24.8
1999 6.6 24.8
Thereafter 42.9 277.5
------ ------
Total future minimum obligations $ 77.0 $397.8
====== ======
Present value, including $3.1 million current
portion of capital lease obligations $ 44.7 $164.7
====== ======
</TABLE>
Property and Equipment, Net
Property and equipment was adjusted to fair market value at October 3, 1992.
The revaluation resulted in a net increase in property and equipment of $283.4
million, including the elimination of all accumulated depreciation.
Property and equipment is as follows:
<TABLE>
<CAPTION>
January 28, January 29,
(In millions) 1995 1994
- ------------------------------------------------------------
<S> <C> <C>
Land $121.7 $121.7
Buildings and improvements 376.4 358.8
Leasehold improvements 70.9 57.4
Fixtures and equipment 209.1 144.9
Construction in progress 24.4 9.9
Leased property under capital leases,
primarily buildings 38.3 38.5
Revalued leases 112.5 112.5
------ ------
953.3 843.7
------ ------
Less accumulated depreciation and
amortization 65.0 33.1
------ ------
Property and equipment, net $888.3 $810.6
====== ======
</TABLE>
15
<PAGE>
Capital expenditures in the past three years have been focused on
modernization of stores and support facilities. Expenditures include
renovating, expanding, and re-equipping existing stores and expenditures for
improvements and fixtures for administrative facilities and distribution
centers.
Depreciation expenses included in selling, general and administrative
expenses were $32.1 million in 1994, $25.7 in 1993, $8.0 million for the
seventeen week period ended January 30, 1993, and $21.5 million for the thirty-
five week period ended October 3, 1992.
Credit Facility
Working capital financing is provided under a General Electric Capital
Corporation ("GE Capital") facility (the "Credit Facility") which matures
October 8, 1996. The facility provides for up to $225.0 million in working
capital borrowings secured on a first priority basis by substantially all of the
Company's tangible and intangible personal property. Interest is computed at a
rate equivalent to one and one-half percent above the GE Capital index rate. In
addition, the facility includes a commitment fee of one-half percent on the
unused portion of the credit line and requires the payment of administrative
fees and line-of-credit fees equivalent to 2.375 percent of the face amount of
letter-of-credit obligations. In addition, the facility includes restrictions
on capital expenditures and the payment of dividends and includes covenants for
material adverse changes, minimum aggregate net cash flow and earnings before
interest, taxes, depreciation and amortization. As of January 28, 1995, there
were $11.7 million in advances and $48.7 million in letters of credit
outstanding under the facility.
Long-Term Debt
<TABLE>
<CAPTION>
January 28, January 29,
(In millions) 1995 1994
- -----------------------------------------------------------------------
<S> <C> <C>
Receivables based financing
Receivables facility $509.1 $332.2
Subordinated asset backed notes
7.55 percent notes due 1999 38.0
11.0 percent notes due 1999 26.0
------ ------
$573.1 $332.2
====== ======
Other secured long-term debt
Term loans due in 1999 (6.75 percent at
January 28, 1995 and 3.875 percent at
January 29, 1994) $ 89.7 $ 89.7
9.0 percent notes due 1997-2002 77.1 68.5
9.9 percent notes due 1995-2010 9.9 9.4
10.67 percent notes due 1997-2002 344.0 344.0
Other notes (8.25 percent to 9.9 percent at
January 28, 1995 and January 29, 1994) 5.4 6.3
------ ------
526.1 517.9
Less current portion of long-term debt 3.6 .6
------ ------
$522.5 $517.3
====== ======
6.25 percent convertible senior subordinated
notes due 2000 $143.8 $143.8
====== ======
</TABLE>
Up to $575.0 million in receivables based financing is provided under a
receivables facility provided by GE Capital. The GE Capital facility provides
for Blue-Hawk Funding Corporation, a limited purpose corporation not affiliated
with the Company, to acquire interests in the Company's credit card receivables
and pay for these interests through the issuance of commercial paper.
Outstanding borrowings under the facility, which are secured by the Company's
customer receivables, accrue interest at the A-1/P-1 commercial paper rate plus
1.08%. At January 28, 1995, the interest rate for borrowings under the facility
was 7.3%.
16
<PAGE>
A private placement of an additional $64.0 million in receivables based
financing is provided under subordinated asset backed notes (the "Asset Backed
Notes") completed in September 1994. The notes were issued in two classes:
$38.0 million of 7.55% Class A notes due in 1999 and $26.0 million of 11.0%
Class B notes due 1999. The notes are redeemable at the option of the Company,
in whole or in part, on each interest payment date on or after October 15, 1994
and on October 8, 1996 at a redemption price combining principal, accrued
interest, unpaid interest, and a make-whole premium.
On December 31, 1991,the Company and Prudential concluded the Prudential
Settlement Agreement with respect to the $344.0 million of notes (the "Existing
Notes") due 1993 to 1997. The Prudential Settlement Agreement, which became
effective on October 8, 1992, extended the maturity of the notes for five years
to October 2002. In addition, previously accrued and unpaid interest and
certain other charges totalling $53.4 million were capitalized into a 9 percent
note (the "Accrued Interest Note"). Principal payments on the Accrued Interest
Note will commence in November 1997, continuing in equal monthly installments
through October 2002. Although the Existing Notes continued to accrue interest
at the blended contract rate of 10.67 percent during the first two years
following the Emergence Date, the Company was only required to pay interest at a
lower rate of 7.5 percent (the "Pay Rate"). The difference between the Pay Rate
and the blended contract rate amounted to $23.8 million and was capitalized
under the terms of the Accrued Interest Note with principal payments commencing
in November 1997 and continuing in equal installments over the remaining life of
the notes.
On July 28, 1992, the Company and Bank of America NT&SA ("BofA") concluded
the BofA Settlement Agreement with respect to the $89.7 million of term loans
due in 1995. The BofA Settlement Agreement, which became effective on October 8,
1992, extends the maturity of the term loans for four years to June 1999. In
accordance with the BofA Settlement Agreement, interest from October 8, 1992
through June 30, 1995, will be payable at LIBOR plus .625 percent and thereafter
at LIBOR plus 1.25 percent.
On December 21, 1993, the Company issued and sold $143.75 million of 6.25%
Convertible Senior Subordinated Notes due December 31, 2000 (the "Convertible
Notes"). Prior to the maturity date, the notes are convertible at the option of
the holder into shares of Common Stock, at a conversion price of $12.19 per
share, subject to adjustment in certain events. The notes are redeemable at the
option of the Company, in whole or in part, at any time on and after December
31, 1998, at a redemption price equal to 100% of the principal amount thereof,
together with accrued and unpaid interest. The notes do not provide for any
sinking fund. Upon a Change in Control (as defined in the Registration
Statement), holders of the Convertible Notes will have the right, subject to
certain restrictions and conditions, to require the Company to purchase all or
any part of the notes at the principal amount thereof together with accrued and
unpaid interest to the date of purchase.
Principal maturities of other secured long-term debt payable over the next
five years are $3.6 million in 1995, $5.4 million in 1996, $9.8 million in 1997,
$21.6 million in 1998, $95.4 million in 1999, with $390.3 million due
thereafter. This debt is secured by property with a net carrying value of
$491.9 million.
The Company's debt agreements include restrictions on capital expenditures
and covenants for minimum aggregate net cash flow and earnings before interest,
taxes, depreciation and amortization.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107 ("SFAS No. 107") requires
the disclosure of fair value of financial instruments for which it is practical
to estimate that value. The Company's various long term debt liabilities
constitute the only financial instruments with a potential carrying value
different from fair value. Each class of financial instrument requires
different methods of estimating fair value as described below.
Receivables based financing - Financing under the receivables facility of
$509.1 million bear interest at floating rates which reflect short-term
market rate changes and are assumed to have a book value that approximates
fair value. The $64.0 million of asset backed notes were issued in a
September 1994 private placement and their fair value is assumed not to have
changed significantly at year-end.
17
<PAGE>
Other Secured long-term debt - Management believes that no practicable method
exists for establishing a current fair value for the $526.1 million secured
long-term debt because arrangements with similar terms would not have been
negotiable outside of bankruptcy proceedings. Discounting assumptions are
likewise not ascertainable as each lender has a unique perception of fair
value depending on their unique assessment of credit risk, their targeted
investment goals and their relationship to the Company. Except for the $89.7
million of borrowings which bear interest at LIBOR plus 0.625%, all other
borrowings are at fixed rates from 8.25% to 10.67%.
Convertible Senior Subordinated Notes - These notes were issued in a private
placement during December 1993. Since these notes are privately held, there
is no readily ascertainable market value for these notes. The fair value of
these notes cannot be compared to other publicly traded securities because
the notes are unique with respect to the conversion price, relationship to
stock price, maturity date, and interest rate.
Retirement Plans
The Company has two qualified noncontributory pension plans covering
substantially all employees. Employees who have completed one year of
employment, are at least 21 years of age, and are not covered by a collectively
bargained pension plan, are covered by the plans and become vested for benefit
purposes after completing five years of employment with the Company. The
Company also has unfunded nonqualified pension plans covering certain employees
and directors. The Company contributes at least the actuarially determined
minimum amount necessary to fund participants' benefits in accordance with the
requirements of the Employee Retirement Income Security Act of 1974.
Periodically, changes in the business environment cause management to revise
significant actuarial assumptions used in the development of the pension plans
funded status and for computation of pension expense. As of January 29, 1994,
the discount factor used to compute the present value of pension liabilities was
reduced from 8.5 percent to 7.25 percent, reflecting the reduction in long-term
rates experienced during 1993. Lower actual and expected rates of inflation
also resulted in reductions to the long-term rate of return on assets from 9.5
percent to 9.25 percent and in the projected rate of compensation increases from
5.0 percent to 4.5 percent. In fiscal 1994, a market reversal of long-term
interest rate trends caused the Company to revise the discount factor back to
8.5 percent, effective January 28, 1995.
The assumption changes made effective January 29, 1994 resulted in a $27.1
million increase to the pension liability at that date, of which $14.3 million
was charged directly to equity as a separate component of the Total Accumulated
Deficit. The January 28, 1995 revision to the discount rate resulted in a $28.5
million decrease in the current year end pension liability of which $8.0 million
was credited directly to equity as a separate component of the Total Accumulated
Deficit.
18
<PAGE>
The following table summarizes pension expense and funded status of the
plans, as determined by the Company's actuary, together with an analysis of the
significant actuarial assumptions used:
<TABLE>
<CAPTION>
Year Ended Period Ended
------------------------- --------------------------
January 28, January 29, January 30, October 3,
1995 1994 1993 1992
(In millions except percentage information) (52 weeks) (52 weeks) (17 weeks) (35 weeks)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Service cost $ 4.5 $ 3.8 $ 1.3 $ 2.7
Interest cost 15.2 14.6 4.7 9.5
Actual net return on plan assets 2.8 (13.1) (4.9) (3.6)
Net amortization and deferral (11.8) 3.6 2.0
------- ------- ------- -------
Net pension expense $ 10.7 $ 8.9 $ 3.1 $ 8.6
======= ======= ======= =======
Funded status of plans
Accumulated benefit obligation
Vested benefits $(188.9) $(203.7) $(167.1) $(166.1)
Nonvested benefits (2.3) (3.7) (4.0) (4.9)
------- ------- ------- -------
(191.2) (207.4) (171.1) (171.0)
Effect of projected compensation
increase (8.8) (13.2) (11.1) (12.1)
------- ------- ------- -------
Projected benefit obligation (200.0) (220.6) (182.2) (183.1)
Plan assets at fair value 109.3 114.0 102.9 97.4
------- ------- ------- -------
Funded status (90.7) (106.6) (79.3) (85.7)
Unrecognized net (gain) loss 14.5 27.2 (4.0)
Additional minimum liability recognized
under SFAS No. 87 (6.7) (14.8)
------- ------- ------- -------
Pension liability $ (82.9) $ (94.2) $ (83.3) $ (85.7)
======= ======= ======= =======
Significant actuarial assumptions
Discount rate 8.5% 7.25% 8.5% 8.5%
Long-term rate of return on plan
assets 9.25 9.25 9.5 9.5
Rate of future compensation
increases 4.5 4.5 5.0 5.0
</TABLE>
As of January 28, 1995, the $90.7 million unfunded projected benefit
obligation consisted of $56.2 million relating to the qualified plans and $34.5
million relating to the nonqualified plans.
Certain retired employees also receive health care and life insurance
benefits which are subsidized to varying degrees by the Company. The post-
retirement medical benefits are available only to employees who had retired or
were eligible to retire by August 1, 1991 and who had met all other plan
eligibility requirements. A life insurance benefit of $1,000 per employee is
provided by the Company to all eligible current and retired employees.
Additional life insurance benefits are also provided to a select group of
executives. The executive life benefits were amended effective January 1993, to
reduce the amount of coverage post-retirement, based on age. The amendment
which applies to both current retirees and eligible plan participants resulted
in a $1.9 million reduction to the January 30, 1993 accumulated benefit
obligation. This gain is being amortized as a reduction in post-retirement
benefit expense on a straight line basis over a ten year period representing the
average service period to full eligibility for this benefit.
19
<PAGE>
The following table summarizes the expense and the accumulated benefit
obligation for these plans.
<TABLE>
<CAPTION>
Year Ended Period Ended
-------------------------- -----------------------
January 28, January 29, January 30, October 3,
1995 1994 1993 1992
(In millions) (52 weeks) (52 weeks) (17 weeks) (35 weeks)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Medical Plan Benefits
- ---------------------
Interest cost representing net
periodic plan expense $ 1.9 $ 2.2 $ .7 $ 1.5
====== ====== ====== ======
Accumulated benefit obligation:
Retirees $(22.1) $(25.2) $(24.7) $(24.8)
Fully eligible active plan
participants (.8) (1.0) (1.2) (1.2)
Other active plan participants (.1) (.1) (.1) (.1)
Unrecognized net (gain) loss (2.5) .6 .1
------ ------ ------ ------
Accrued benefit liability $(25.5) $(25.7) $(25.9) $(26.1)
====== ====== ====== ======
Life Insurance Benefits
- -----------------------
Net periodic plan expense:
Service cost $ .1 $ .1 $ $ .2
Interest cost .4 .4 .2 .3
Amortization of prior service
gain (.2) (.2)
------ ------ ------ ------
$ .3 $ .3 $ .2 $ .5
====== ====== ====== ======
Accumulated benefit obligation
at period end:
Retirees $ (3.9) $ (4.4) $ (3.0) $ (4.0)
Fully eligible active plan
participants (.4) (.5) (.6) (1.2)
Other active plan participants (.2) (.3) (.4) (.7)
Unrecognized prior service
gain (1.5) (1.7) (1.9)
Unrecognized net (gain) loss (.3) .8
------ ------ ------ ------
Accrued benefit liability $ (6.3) $ (6.1) $ (5.9) $ (5.9)
====== ====== ====== ======
</TABLE>
The postretirement medical and life insurance benefits are provided under
nonqualified plans. The accumulated benefit obligation represents the present
value of expected future payments discounted at 8.5 percent. Medical inflation
has been projected at a blended rate of eleven percent per annum for fiscal
1995, declining by 2002 to a long term rate of approximately six and one-half
percent per annum. The effect of a one-percentage-point increase in the assumed
medical cost trend rate would be to increase the net periodic medical plan
expense by $.2 million and to increase the related accumulated benefit
obligation by $2.3 million.
The Company's 401(k) Savings and Investment Plan is available to
substantially all employees who have completed one year of service. For
eligible participant contributions made after March 1993, the Company provides a
25 percent matching contribution in the form of newly issued shares of Company
common stock.
At January 28, 1995, the plan held .5 million shares of Common Stock
representing 1.1 percent of common stock outstanding or still issuable under the
POR and .5 million shares of preferred stock representing 55.7 percent of
preferred shares outstanding or still issuable under the POR.
20
<PAGE>
Employee Stock Incentive Plans
The Company has a long-term incentive compensation plan designed to attract
and retain top-quality management. The plan, among other things, provides for
the issuance of stock options at an exercise price that is generally not less
than the market value of the common stock on the date of grant. During the
fiscal year ended January 28, 1995, 1.1 million options were awarded and 82,466
options were exercised under the plan. As of January 28, 1995, 2.4 million
options were outstanding and exercisable at exercise prices ranging from $9.125
to $14.00. The options, which vest in one-third increments over three years,
are exercisable over a ten year period, generally beginning one year from the
date of grant.
Contingencies
Notwithstanding the confirmation and effectiveness of the POR, the Bankruptcy
Court continues to have jurisdiction to, among other things, resolve disputed
prepetition claims against the Company and to resolve other matters that may
arise in connection with or relate to the POR.
Pursuant to the POR, the Company was required to distribute .046 shares of
Common Stock for each $1.00 of allowed general unsecured claims. The POR
estimated the total amount of such claims to be approximately $600.0 million,
against which the Company reserved 27.6 million shares of Common Stock. As of
January 28, 1995, approximately $28.6 million of disputed claims remained
outstanding. Management believes such claims will ultimately be allowed upon
settlement or litigation for approximately $10.0 million, for which the Company
has reserved approximately .8 million shares which are included in the Company's
calculation of its outstanding Common Stock. Management believes that reserved
shares of Common Stock will be sufficient to meet the Company's obligations to
such claim holders. If all disputed claims were allowed in full, such claim
holders would be entitled to a total of 1.3 million shares of Common Stock,
compared to the .8 million shares reserved, resulting in a dilution to holders
of outstanding Common Stock of approximately 1%. Management regularly evaluates
the status of remaining disputed claims and claim settlement experience and
accordingly would adjust its estimate of the number of shares to be reserved for
issuance with respect to such claims if necessary.
The Company is engaged in an ongoing effort to resolve these remaining
disputed claims. Because of the disputed nature of these claims and the delays
associated with litigation generally, Management anticipates that the settlement
of these claims is likely to occur over an extended period of time.
The Company is involved in various other legal proceedings incidental to the
normal course of business. Management does not expect that any of such other
proceedings will have a material adverse effect on the Company's financial
position or results of operations.
Preferred Stock and Warrants
Pursuant to the POR, shares of Series A exchangeable preferred stock, par
value $.01 ("Preferred Stock") or warrants to purchase shares of Common Stock
("Warrants") were issuable to existing holders of Old Common Stock at a rate of
.084 for each share of Old Common Stock held. The Company does not intend to
have the preferred stock listed for trading on any national securities exchange
or other national automated quotation system. The Warrants have been registered
and listed for trading on the New York and Pacific Stock Exchanges.
At the option of the holders of Preferred Stock, shares of Preferred Stock
are exchangeable on a one-for-one basis to Warrants to purchase Common Stock.
During 1994, approximately 96,000 shares of Preferred Stock were converted to
warrants. The Company does not expect ever to pay a dividend with respect to
the Preferred Stock. In the event of dissolution, liquidation, or winding-up,
the holders of Preferred Stock are entitled to a liquidation preference of $0.25
per share from assets remaining after the full satisfaction of the prior rights
of creditors. As of January 28, 1995, the authorized Preferred Stock of the
Company consisted of twenty-five million shares, $.01 par value, of which .8
million shares were issued and outstanding.
21
<PAGE>
Each Warrant entitles the holder any time prior to the close of business on
October 8, 1999, to purchase a share of Common Stock at a purchase price equal
to $17.00 per share, subject to adjustment from time to time. In the event the
market price of the common stock equals or exceeds $25.50 per share for 30
consecutive trading days, the Board of Directors, after the passage of 30 months
from October 8, 1992, may, upon 75 days notice, shorten the exercise period to
end on a date earlier than October 8, 1999.
Common Stock
Pursuant to the POR, effective October 8, 1992, all existing shares of Old
Common Stock were converted into 2.4 million shares of Common Stock and a
combined total of 2.5 million in warrants or shares of convertible preferred
stock. Unsecured claims were converted into approximately 27.6 million shares
of new Common Stock. In addition, in accordance with the POR Zell/Chilmark and
an institutional investor each acquired an additional 2.5 million shares of new
common stock at a price of $10.00 per share.
In addition, shortly after the Effective Date, 80,000 shares of Common Stock
were issued as bonus compensation to certain professionals engaged in the
Chapter 11 proceedings, and a total of approximately 134,000 shares of Common
Stock were issued to employees. In December 1992, all eligible employees each
received ten shares of Common Stock as a result of this stock issuance.
In July 1993, the Company raised net proceeds of $147.5 million through a
public offering of 11.45 million shares of Common Stock.
The accompanying financial statements reflect the issuance of all shares of
Common Stock, preferred stock, and warrants contemplated by the POR. As of
January 28, 1995, up to 1.0 million shares of Common Stock, .1 million shares of
Preferred Stock, and fewer than .1 million Warrants remain issuable under the
POR to satisfy outstanding claims and conversion of unpresented shares of Old
Common Stock. At January 28, 1995, the Company's authorized common stock
consisted of 100 million shares, $.01 par value of which 5.9 million shares were
reserved under the employee stock incentive plan (.2 million options exercised
to date), 1.5 million shares were reserved for purchase by and contribution to
the Company's 401(k) Savings & Investment Plan which currently holds .5 million
shares and 2.5 million shares were reserved for purchase by warrant holders of
which there have been no purchases to date.
The Company's ability to pay dividends on its common stock is restricted
pursuant to the terms of its Credit Facility and the BofA Settlement Agreement.
As a result, the Company does not expect to pay common stock dividends for the
foreseeable future.
22
<PAGE>
BROADWAY STORES, INC.
SCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
Balance Additions Accounts Balance
At Charged to Charged At
Beginning Costs and off Less End
(In thousands) of Period Expenses Recoveries Other of Period
- ------------------------------------ ---------- ---------- ---------- ----- ---------
<S> <C> <C> <C> <C> <C>
Fiscal year ended January 28, 1995.. $17,224 $26,383 $24,615 $ $18,992
======= ======= ======= ===== =======
Fiscal year ended January 29, 1994.. $17,300 $29,545 $29,621 $ $17,224
======= ======= ======= ===== =======
Seventeen week period ended
January 30, 1993
Allowance for doubtful
accounts.......................... $14,583 $14,133 $11,416 $ $17,300
======= ======= ======= ===== =======
Thirty-five week period ended
October 3, 1992
Allowance for doubtful
accounts.......................... $16,605 $22,277 $25,271 $ 972/(1)/ $14,583
======= ======= ======= ===== =======
</TABLE>
/(1)/ Adjusted to fair value in accordance with the Reorganization Statement.
23
<PAGE>
QUARTERLY INFORMATION (unaudited)
<TABLE>
<CAPTION>
Period Ended
----------------------------------------------------------------------
April 30, July 30, October 29, January 28, January 28,
1994 1994 1994 1995 1995
(Dollar amounts in millions) (13 weeks) (13 weeks) (13 weeks) (13 weeks) (52 weeks)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1994
Sales.................................. $ 431.1 $ 457.0 $ 474.9 $ 723.8 $2,086.8
Percent change from prior year
Total sales basis.................... (2.6) (3.8) 1.1 2.6 (.3)
Comparative store sales basis........ 4.7 1.2 3.9 2.8 3.1
Finance charge revenue................. 22.5 22.4 22.2 24.2 91.3
Cost of goods sold, including occupancy
and buying costs/(1)/................. 319.4 338.3 355.3 547.1 1,560.0
Selling, general and administrative
expenses.............................. 129.7 130.5 134.7 159.4 554.4
Interest expense, net.................. 22.5 23.5 25.5 29.4 100.9
------- ------- ------- ------- --------
Earnings (loss) from operations before
income taxes.......................... (18.0) (12.9) (18.4) 12.1 (37.2)
Income tax expense/(2)/................ (.2) (.2)
------- ------- ------- ------- --------
Net earnings (loss).................... $ (18.0) $ (12.9) $ (18.4) $ 11.9 $ (37.4)
======= ======= ======= ======= ========
Net earnings (loss) per common share... $ (.38) $ (.28) $ (.39) $ .25 $ (.80)
======= ======= ======= ======= ========
</TABLE>
/(1)/ As a result of the seasonal nature of the Company's business, the Company
follows the practice of allocating certain fixed buying and occupancy
costs among quarters within the fiscal year in proportion to projected
quarterly sales results. This process results in a higher portion of
yearly fixed buying and occupancy costs being allocated to the fourth
quarter.
/(2)/ For fiscal 1994, the Company recorded a $.2 million charge for state
franchise taxes in the fourth quarter.
24
<PAGE>
QUARTERLY INFORMATION (unaudited)
<TABLE>
<CAPTION>
Period Ended
---------------------------------------------------------------------
May 1, July 31, October 30, January 29, January 29,
1993 1993 1993 1994 1994
(Dollar amounts in millions) (13 weeks) (13 weeks) (13 weeks) (13 weeks) (52 weeks)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1993
Sales................................... $ 442.5 $ 474.9 $ 469.7 $ 705.6 $2,092.7
Percent change from prior year
Total sales basis..................... 2.0 (1.3) (4.2) (3.7) (2.1)
Comparative store sales basis......... 5.2 1.3 (.8) 1.3 1.6
Finance charge revenue.................. 21.2 19.9 18.9 21.5 81.5
Cost of goods sold, including occupancy
and buying costs (1) .................. 329.5 360.3 360.0 539.3 1,589.1
Selling, general and administrative
expenses............................... 129.2 130.3 133.9 157.8 551.1
Charge for non-recurring costs (2)...... 25.0 20.0 45.0
Interest expense, net................... 22.3 21.7 19.8 21.1 84.9
------- ------- ------- ------- --------
Earnings (loss) from operations before
income taxes........................... (17.3) (42.5) (25.1) (11.1) (95.9)
Income tax benefit (expense)(3)......... 6.9 (6.9)
------- ------- ------- ------- --------
Net loss................................ $ (10.4) $ (42.5) $ (25.1) $ (18.0) $ (95.9)
======= ======= ======= ======= ========
Net loss per common share............... $ (.29) $ (1.12) $ (.54) $ (.38) $ (2.30)
======= ======= ======= ======= ========
</TABLE>
(1) As a result of the seasonal nature of the Company's business, the Company
follows the practice of allocating certain fixed buying and occupancy
costs among quarters within the fiscal year in proportion to projected
quarterly sales results. This process results in a higher portion of
yearly fixed buying and occupancy costs being allocated to the fourth
quarter.
(2) Non-recurring costs include $25.0 million in the second quarter and $5.0
million in the fourth quarter for one-time costs to be incurred in the
implementation of the strategic plan to streamline the Company. The
fourth quarter also includes a charge of $15.0 million to cover January
1994 earthquake related losses in excess of insurance proceeds.
(3) For fiscal 1993, the Company recorded a zero net tax benefit comprised of
a federal deferred tax benefit of $2.6 million offset by a state deferred
tax provision of $2.6 million. The federal tax benefit was limited to the
$2.6 million beginning of the year federal deferred tax liability. The
state tax provision resulted from a California tax law change enacted in
late 1993 which reduced the carryover period for California net operating
loss carryforwards from fifteen years to five years. These adjustments
were reflected in the fourth quarter of the year, resulting in the
elimination of the first quarter benefit which was established on the
basis of a 40% statutory rate applied to pretax results.
25
<PAGE>
BROADWAY STORES, INC.
Consolidated Statement of Earnings
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-Six Weeks Ended
----------------------- -----------------------
July 29, July 30, July 29, July 30,
1995 1994 1995 1994
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Sales $460,639 $457,030 $884,550 $888,107
Finance charge revenue 23,691 22,388 48,285 44,925
Cost of goods sold, including
occupancy and buying costs 351,797 338,288 676,550 657,654
Selling, general, and
administrative expenses 138,617 130,549 274,532 260,244
-------- -------- -------- --------
Earnings (loss) from operations
before interest expense and
income taxes (6,084) 10,581 (18,247) 15,134
Interest expense, net 31,364 23,516 62,499 46,029
-------- -------- -------- --------
Pretax loss (37,448) (12,935) (80,746) (30,895)
Income taxes 0 0 0 0
-------- -------- -------- --------
Net loss $(37,448) $(12,935) $(80,746) $(30,895)
======== ======== ======== ========
Loss per common share $ (0.80) $ (0.28) $ (1.72) $ (0.66)
======== ======== ======== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
26
<PAGE>
BROADWAY STORES, INC.
Consolidated Balance Sheet
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
July 29, January 28, July 30,
1995 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
ASSETS
Current assets
Cash $ 15,901 $ 18,318 $ 15,575
Accounts receivable, net 559,939 664,825 569,931
Merchandise inventories 390,825 504,522 415,443
Other current assets 25,418 11,613 27,640
---------- ---------- ----------
992,083 1,199,278 1,028,589
Property and equipment, net 885,002 888,258 816,947
Other assets 34,521 39,540 35,572
---------- ---------- ----------
$1,911,606 $2,127,076 $1,881,108
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Notes payable $ 51,676 $ 11,740 $
Current installments 6,750 6,750 3,460
Accounts payable 107,295 175,622 128,997
Accrued expenses 113,029 141,027 125,525
Current income taxes 824 1,002 977
---------- ---------- ----------
279,574 336,141 258,959
Receivables based financing 503,584 573,138 392,143
Other secured long-term debt 521,384 522,517 523,517
Convertible subordinated notes 143,750 143,750 143,750
Capital lease obligations 39,930 41,524 43,199
Other liabilities 103,121 109,504 121,227
Deferred income taxes 14,850 14,850 14,850
Shareholders' equity
Preferred stock, $.01 par value 8 9 9
Common stock, $.01 par value 470 469 469
Other paid-in capital 502,545 502,038 501,425
Accumulated deficit (197,610) (116,864) (118,440)
---------- ---------- ----------
305,413 385,652 383,463
---------- ---------- ----------
$1,911,606 $2,127,076 $1,881,108
========== ========== ==========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
27
<PAGE>
BROADWAY STORES, INC.
Consolidated Statement of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-Six Weeks Ended
-------------------------- --------------------------
July 29, July 30, July 29, July 30,
1995 1994 1995 1994
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Operating activities
Loss from operations $(37,448) $(12,935) $(80,746) $(30,895)
Adjustments to reconcile
loss from operations
to net operating cash flows
Depreciation and amortization 12,703 10,192 25,339 20,201
Changes in operating assets and liabilities
Customer receivables, net 15,528 4,438 71,718 39,048
Merchandise inventories 44,618 (9,935) 113,697 12,188
Accounts payable and accrued expenses 12,554 (4,139) (96,325) (49,166)
Other, net 7,453 (28,273) 11,158 (31,239)
-------- -------- -------- --------
Net cash provided (used)
by operating activities 55,408 (40,652) 44,841 (39,863)
-------- -------- -------- --------
Investing activities
Purchases of property and equipment (6,988) (14,387) (15,420) (21,741)
-------- -------- -------- --------
Financing activities
Net change in financing under
receivables based facility (11,859) 52,582 (69,554) 59,961
Net change in financing under
working capital facility (37,076) 39,936
Retirements of long-term debt and
capital lease obligations (1,531) (808) (2,727) (1,615)
Issuances of common stock 507 426 507 641
-------- -------- -------- --------
Net cash provided (used)
by financing activities (49,959) 52,200 (31,838) 58,987
-------- -------- -------- --------
Net decrease in cash (1,539) (2,839) (2,417) (2,617)
Cash at the beginning of the period 17,440 18,414 18,318 18,192
-------- -------- -------- --------
Cash at the end of the period $ 15,901 $ 15,575 $ 15,901 $ 15,575
======== ======== ======== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
28
<PAGE>
BROADWAY STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Basis of Reporting
The consolidated financial statements have been prepared in accordance
with the instructions to Form 10-Q of the Securities and Exchange Commission and
should be read in the context of the Summary of Significant Accounting Policies
and Financial Review contained in the Company's Annual Report on Form 10-K for
the fifty-two week period ended January 28, 1995. In the opinion of the
Company's management, these statements contain all adjustments, all of which are
of a normal recurring nature, necessary for the amounts shown to be fairly
stated as of July 29, 1995 and July 30, 1994 and for the thirteen and twenty-six
week periods then ended. The Balance Sheet as of January 28, 1995 is as
included in the Company's Form 10-K report for the year ended January 28, 1995.
Earnings Per Share of Common Stock
Earnings per share are computed on the basis of the weighted average
number of shares outstanding during the period, including dilutive stock options
and all 35.0 million shares of Common Stock expected to be issued in accordance
with the plan of reorganization (the "POR") approved in connection with the
Company's emergence from bankruptcy on October 8, 1992 (the "Emergence Date").
As of July 29, 1995, 1.0 million shares of common stock remained reserved for
issuance in accordance with the POR.
Inventories
The last-in, first-out ("LIFO") method of accounting resulted in charges
to cost of goods sold of $1.0 million and $2.0 million for the thirteen and
twenty-six week periods ended July 29, 1995, and $.5 million and $1.0 million
in the comparative prior year periods. If all inventories had been valued on a
first-in, first-out basis, they would have been lower by $12.3 million, $14.3
million and $9.8 million at July 29, 1995, January 28, 1995 and July 30, 1994
respectively.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of
R. H. Macy & Co., Inc. (Debtor-in-Possession)
We have audited the accompanying consolidated statements of financial condition
of R. H. Macy & Co., Inc. (Debtor-in-Possession) and consolidated subsidiaries
as of July 30, 1994 and July 31, 1993, and the related consolidated statements
of operations, cash flows and changes in deficiency in net assets for each of
the three years in the period ended July 30, 1994. Our audits also included the
accompanying financial statement schedules. These consolidated financial
statements and financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of R. H. Macy & Co., Inc.
(Debtor-in-Possession) and consolidated subsidiaries as of July 30, 1994 and
July 31, 1993, and the results of their operations and their cash flows for each
of the three years in the period ended July 30, 1994 in conformity with
generally accepted accounting principles. Also, in our opinion, such financial
statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
As discussed in Note 1 of notes to consolidated financial statements, the
Company and certain of its subsidiaries have filed for reorganization under
Chapter 11 of the Federal Bankruptcy Code. The accompanying consolidated
financial statements do not purport to reflect or provide for the consequences
of the bankruptcy proceedings. In particular, such consolidated financial
statements do not purport to show (a) as to assets, their realizable value on a
liquidation basis or their availability to satisfy liabilities; (b) as to
pre-petition liabilities, the amounts that may be allowed for claims or
contingencies, or the status and priority thereof; (c) as to stockholder
accounts, the effect of any changes that may be made in the capitalization of
the Company; or (d) as to operations, the effect of any additional changes that
may be made in its business. The outcome of these matters is not presently
determinable.
The accompanying consolidated financial statements have been prepared assuming
that the Company and its subsidiaries will continue as a going concern. The
results of operations for each of the three years in the period ended July 30,
1994 together with the uncertainties relating to the confirmation of the joint
plan of reorganization and the consummation of the related merger agreement,
among other matters, raise substantial doubt about the Company's ability to
continue as a going concern. Management's discussion of these matters is set
forth in Notes 1 and 2 of notes to consolidated financial statements. The
consolidated financial statements do not include adjustments that might result
from the outcome of the uncertainties referred to herein and in the preceding
paragraph.
As discussed in Notes 18 and 19 of notes to consolidated financial statements,
the Company changed its methods of accounting for income taxes and
postretirement benefits other than pensions effective August 1, 1993 to conform
with Statements of Financial Accounting Standard Nos. 109 and 106.
DELOITTE & TOUCHE LLP
New York, New York
September 19, 1994
(September 28, 29 and 30, 1994
as to the last paragraphs of
Notes 18, 2 and 20, respectively)
1
<PAGE>
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
JULY 30, JULY 31,
1994 1993
----------- -----------
<S> <C> <C>
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE)
ASSETS
Current Assets:
Cash and cash equivalents (Note 3).......................................... $ 112,677 $ 41,533
Restricted cash (Note 3).................................................... 44,393 34,915
Other receivables........................................................... 122,641 119,670
Merchandise inventories (Notes 3 and 4)..................................... 1,244,253 1,279,744
Prepaid expenses............................................................ 62,270 68,512
----------- -----------
Total Current Assets.................................................... 1,586,234 1,544,374
----------- -----------
Other Assets:
Investment in joint venture at equity....................................... 23,347 17,197
Other assets (Notes 3 and 5)................................................ 75,971 103,091
----------- -----------
99,318 120,288
----------- -----------
Property and Equipment (Notes 3, 8, 9 and 20):
Land........................................................................ 404,311 417,072
Building and improvements on owned properties............................... 1,465,212 1,521,521
Building and improvements on leased properties.............................. 633,022 463,602
Fixtures and equipment...................................................... 866,154 922,579
Construction in progress.................................................... 123,758 99,267
Capitalized leases.......................................................... 111,145 82,515
Leasehold values............................................................ 20,939 19,210
----------- -----------
3,624,541 3,525,766
Accumulated depreciation and amortization................................... 1,166,307 1,089,939
----------- -----------
2,458,234 2,435,827
----------- -----------
$ 4,143,786 $ 4,100,489
----------- -----------
----------- -----------
LIABILITIES AND DEFICIENCY IN NET ASSETS
Current Liabilities:
Accounts payable and accrued liabilities (Note 6)........................... $ 841,167 $ 874,492
Short-term borrowings (Note 7).............................................. -- 62,698
Current income taxes (Note 18).............................................. 510 402
Current portion of obligations under capitalized leases (Note 20)........... 15,222 13,891
----------- -----------
Total Current Liabilities............................................... 856,899 951,483
----------- -----------
Deferred Taxes (Note 18)..................................................... 18,720 --
Other Long-Term Liabilities.................................................. 128,435 117,265
Obligations Under Capitalized Leases (Note 20)............................... 44,240 27,829
Obligations Subject to Settlement Under Reorganization Proceedings (Note
8).......................................................................... 5,639,810 5,568,603
Preferred Stock (Note 10):
par value $1.00 per share, authorized 25,000,000 shares, Series I, II and
III cumulative, 8%:
Series I, 9,000,000 shares designated, 7,494,465 shares outstanding in
1994 and 1993, aggregate liquidation preference $296,900,000,
redeemable.............................................................. -- --
Series II, 1,000,000 shares designated, 211,506 shares outstanding in 1994
and 1993, aggregate liquidation preference $33,640,000, redeemable...... -- --
Series III, 7,000,000 shares designated, 5,298,330 shares outstanding in
1994 and 1993, aggregate liquidation preference $168,540,000,
redeemable.............................................................. -- --
Deficiency in Net Assets:
Common stock, par value $1.00 per share, 40,000,000 authorized, 1,750,000
issued in 1994 and 1993 (Notes 11 and 12)................................. 1,750 1,750
Deficit..................................................................... (2,544,735) (2,565,108)
Less: Treasury Stock, at cost, 133,300 shares in 1994 and 1993.............. (1,333) (1,333)
----------- -----------
Deficiency in Net Assets.................................................. (2,544,318) (2,564,691)
----------- -----------
$ 4,143,786 $ 4,100,489
----------- -----------
----------- -----------
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
--------------------------------------------------------------------------
JULY 30, 1994 JULY 31, 1993 AUGUST 1, 1992
---------------------- ---------------------- ----------------------
(52 WEEKS) (52 WEEKS) (52 WEEKS)
PERCENT PERCENT PERCENT
AMOUNT OF SALES AMOUNT OF SALES AMOUNT OF SALES
----------- -------- ----------- -------- ----------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE)
<S> <C> <C> <C> <C> <C> <C>
Net retail sales (including
licensed departments) (Note 13)... $ 6,163,346 100.0% $ 6,299,982 100.0% $ 6,448,885 100.0%
Less:
Cost of goods sold, including
occupancy and buying costs...... 4,378,315 71.0 4,461,945 70.8 4,753,627 73.7
Selling, general and
administrative expenses......... 1,759,205 28.6 1,909,648 30.3 2,025,294 31.4
Unusual items--net (Note 16)...... 19,500 0.3 20,255 0.3 314,926 4.9
----------- -------- ----------- -------- ----------- --------
Income/(loss) from operations
before interest expense,
earthquake loss and reorganization
items............................. 6,326 0.1 (91,866) (1.4) (644,962) (10.0)
Interest expense--net (Contractual
interest of $475,083 in 1994,
$439,894 in 1993 and $443,665 in
1992) (Note 14)................. 198,600 3.2 236,376 3.8 344,223 5.3
Earthquake loss (Note 15).......... 15,000 0.2 -- -- -- --
----------- -------- ----------- -------- ----------- --------
Loss before reorganization
items--net........................ (207,274) (3.3) (328,242) (5.2) (989,185) (15.4)
Reorganization items--net (Note
17)............................. (38,682) (0.6) 214,659 3.4 261,122 4.0
----------- -------- ----------- -------- ----------- --------
Loss before income taxes/(benefit)
and cumulative effect of an
accounting change................. (168,592) (2.7) (542,901) (8.6) (1,250,307) (19.4)
Income taxes/(benefit) (Note
18)............................. (3,625) -- 1,000 -- 1,000 --
----------- -------- ----------- -------- ----------- --------
Net loss before cumulative effect
of an accounting change........... (164,967) (2.7) (543,901) (8.6) (1,251,307) (19.4)
Cumulative effect of an accounting
change (Note 18)................ 185,340 3.0 -- -- -- --
----------- -------- ----------- -------- ----------- --------
Net earnings/(loss)................ $ 20,373 0.3% $ (543,901) (8.6)% $(1,251,307) (19.4)%
----------- -------- ----------- -------- ----------- --------
----------- -------- ----------- -------- ----------- --------
Primary earnings/(loss) per share
of common stock: (Note 3)
Net loss before cumulative effect
of an accounting change......... $ (102.02) $ (336.36) $ (782.13)
Cumulative effect of an accounting
change.......................... 114.62 -- --
----------- ----------- -----------
Primary earnings/(loss) per
share of common stock......... $ 12.60 $ (336.36) $ (782.13)
----------- ----------- -----------
----------- ----------- -----------
Fully diluted earnings per share of
common stock: (Note 3)
Net loss before cumulative effect
of an accounting change......... $ (11.28)
Cumulative effect of an accounting
change.......................... 12.68
-----------
Fully diluted earnings per share
of common stock............... $ 1.40
-----------
-----------
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
----------------------------------------------
JULY 30, 1994 JULY 31, 1993 AUGUST 1, 1992
------------- ------------- --------------
(52 WEEKS) (52 WEEKS) (52 WEEKS)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net earnings/(loss)......................................... $ 20,373 $(543,901) $ (1,251,307)
Adjustments to reconcile net earnings/(loss) to
net cash provided by/(used for) operating activities:
Depreciation and amortization........................... 306,717 287,195 288,757
Interest accrued on pre-petition debt and termination
compensation asserted to be due under interest rate
protection agreements.................................. 65,238 285,974 154,728
Reorganization items--net............................... 29,475 35,263 117,834
Earthquake loss......................................... 15,000 -- --
Non-cash interest....................................... 29,406 21,722 41,339
Loss/(gain) on disposal of property..................... 289 (13,286) --
Accrued postretirement benefits......................... 20,534 -- --
Cumulative effect of an accounting change............... (185,340) -- --
Write-off of excess of cost over fair value of net
assets acquired........................................ -- -- 241,452
Deferred taxes.......................................... (5,248) -- --
Other................................................... (550) -- 5,748
Change in current assets and liabilities:
Restricted cash......................................... (9,478) (1,285) (33,630)
Other receivables....................................... 18,651 1,520 3,494
Merchandise inventories................................. 9,928 (69,206) 242,208
Prepaid expenses........................................ 4,142 (3,906) 6,674
Accounts payable and accrued liabilities................ (71,293) (50,549) 616,673
Income taxes............................................ 108 (4) 406
Increase in working capital and other liabilities due to
reorganization activities............................... (8,620) (27,421) (914,853)
Decrease/(increase) in other assets....................... 2,655 25,651 (21,392)
Increase/(decrease) in other liabilities and deferred
taxes................................................... (3,552) 16,736 83,032
Other, net................................................ (231) (11) 2,000
------------- ------------- --------------
Net cash provided by/(used for) operating activities........ 238,204 (35,508) (416,837)
------------- ------------- --------------
INVESTING ACTIVITIES:
Additions to property and equipment......................... (143,070) (113,913) (246,219)
Insurance proceeds from earthquake damage................... 73,000 -- --
Proceeds from disposition of assets......................... 2,580 14,299 --
------------- ------------- --------------
Net cash used for investing activities...................... (67,490) (99,614) (246,219)
------------- ------------- --------------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt.................... -- -- 9,100
Proceeds from/(repayment of) short-term borrowings.......... (65,900) 65,900 (125,495)
Repurchase of treasury shares............................... -- -- (175)
Repayments of secured debt included in obligations
subject to settlement under reorganization proceedings.... (9,511) -- --
Repayments of long-term debt and
obligations under capitalized leases...................... (19,323) (11,826) (50,871)
Deferral of debt due to reorganization activities........... -- -- (3,627,579)
Decrease in preferred stock due to reorganization
activities................................................ -- -- (637,315)
Cost of debtor-in-possession financing and short-term
borrowings................................................ (4,836) -- (15,000)
Other....................................................... -- -- 1,275
------------- ------------- --------------
Net cash provided by/(used for) financing activities........ (99,570) 54,074 (4,446,060)
------------- ------------- --------------
CASH FLOW EFFECT OF REORGANIZATION ACTIVITIES:
Increase in obligations subject to settlement under
reorganization proceedings................................ -- -- 5,179,747
------------- ------------- --------------
Net cash flow effect of reorganization activities........... -- -- 5,179,747
------------- ------------- --------------
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS............. 71,144 (81,048) 70,631
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............... 41,533 122,581 51,950
------------- ------------- --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD..................... $ 112,677 $ 41,533 $ 122,581
------------- ------------- --------------
------------- ------------- --------------
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SUPPLEMENTAL INFORMATION
Amounts in these statements of cash flows are presented on a cash basis and
may differ from those shown in other sections of this report.
Interest paid (excluding interest capitalized during construction) was
$16,196,000, $12,428,000 and $199,022,000 in 1994, 1993 and 1992. Income taxes
paid and tax refunds received were as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---------- ----------- -----------
<S> <C> <C> <C>
Income taxes paid.................... $1,648,000 $ 1,121,000 $ 1,127,000
Income tax refunds received.......... (132,000) (117,000) (3,466,000)
---------- ----------- -----------
Net income tax payments/(refunds).... $1,516,000 $ 1,004,000 $(2,339,000)
---------- ----------- -----------
</TABLE>
Preferred Stock increased by $19,649,000 in 1992 through a related charge to
the deficiency in net assets.
Additions to property and equipment of $32,793,000, $21,850,000 and
$29,993,000 were recorded in 1994, 1993 and 1992 by incurring obligations under
capitalized leases. Property held for sale at estimated net realizable value of
$19,500,000 was reclassified to Other Receivables in fiscal 1994.
On August 1, 1993 Macy's adopted Financial Accounting Standards Board
Statement No. 109, Accounting for Income Taxes ("FASB 109"). FASB 109 requires a
remeasurement of certain assets and liabilities. Property and equipment and
other certain assets were increased by $191,132,000 and $18,176,000,
respectively. A deferred tax liability and a Cumulative Effect of an Accounting
Change was recorded as the corresponding amount.
In 1993, Macy's assumed approximately $24,451,000 of capitalized leases
which were reclassified from the caption Obligations Subject to Settlement Under
Reorganization Proceedings to the caption Obligations Under Capitalized Leases.
In 1993, secured debt included in the caption Obligations Subject to
Settlement Under Reorganization Proceedings was reduced by $5,969,000 due to
third party assumption of such debt. A corresponding rent receivable was
reduced.
5
<PAGE>
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN DEFICIENCY IN NET ASSETS
<TABLE>
<CAPTION>
COMMON SHARES TREASURY SHARES
-------------------- -------------------
NUMBER DOLLARS DEFICIT NUMBER DOLLARS
--------- ------- ----------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance, August 3, 1991................. 1,750,000 $ 1,750 $ (750,251) (115,800) $(1,158)
Net loss.............................. (1,251,307)
Preferred dividends................... (19,305)
Accretion of redeemable
preferred stock..................... (344)
Treasury shares acquired.............. (17,500) (175)
--------- ------- ----------- -------- -------
Balance, August 1, 1992................. 1,750,000 1,750 (2,021,207) (133,300) (1,333)
Net loss.............................. (543,901)
--------- ------- ----------- -------- -------
Balance, July 31, 1993.................. 1,750,000 1,750 (2,565,108) (133,300) (1,333)
Net earnings.......................... 20,373
--------- ------- ----------- -------- -------
Balance, July 30, 1994.................. 1,750,000 $ 1,750 $(2,544,735) (133,300) $(1,333)
--------- ------- ----------- -------- -------
--------- ------- ----------- -------- -------
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. CHAPTER 11 PROCEEDINGS
On January 27, 1992, R. H. Macy & Co., Inc. ("Macy's"), together with nine
of its subsidiaries, filed voluntary petitions for reorganization under Chapter
11 ("Chapter 11"), title 11 of the United States Code, as amended (the
"Bankruptcy Code") in the United States Bankruptcy Court for the Southern
District of New York (the "Bankruptcy Court"). On January 31, 1992,
seventy-eight additional subsidiaries each commenced a Chapter 11 case in the
Bankruptcy Court. Macy's and its subsidiaries that filed a Chapter 11 case in
Bankruptcy Court are herein defined collectively as the "Macy's Debtors" and are
currently operating their respective businesses as debtors-in-possession. Two
statutory creditor committees have been appointed. The cases of Macy's
subsidiaries that filed such petitions are jointly administered with the case of
Macy's for procedural purposes only.
The consolidated financial statements of Macy's have been prepared in
accordance with generally accepted accounting principles applicable to a going
concern, which assumes continuity of operations in the ordinary course of
business. As a result of the Chapter 11 cases and circumstances relating to this
event, including Macy's leveraged debt structure, recurring losses, and economic
conditions, the realization of assets and liquidation of liabilities are subject
to significant uncertainty. Additionally, the amounts reported in the
consolidated statement of financial condition at July 30, 1994 could materially
change in the future because of the plan of reorganization, since such reported
amounts do not give effect to adjustments to the carrying value of the
underlying assets or amounts of liabilities that may ultimately result.
Generally, actions to enforce or otherwise effect the payment of
pre-petition liabilities are stayed while the Macy's Debtors are under the
protection of the Bankruptcy Code. These liabilities will be resolved as part of
the reorganization proceedings. Additional liabilities subject to similar
resolution may arise as a result of claims filed by parties related to the
rejection of any executory contracts, including unexpired leases, and from the
Bankruptcy Court's allowance for contingent and other disputed claims (see Note
8).
Substantially all of Macy's pre-petition short and long-term debt at July
30, 1994 is in default of the terms of the applicable loan agreements and is
subject to settlement under the reorganization process. For financial reporting
purposes, these liabilities (which are dependent upon the outcome of the Chapter
11 process) have been segregated and reclassified as Obligations Subject to
Settlement Under Reorganization Proceedings. Payment of certain pre-petition
liabilities that have been approved for payment by the Bankruptcy Court or were
pending approval have been included in the appropriate liability captions.
2. PROPOSED JOINT PLAN OF REORGANIZATION: MERGER WITH FEDERATED DEPARTMENT
STORES, INC.
On July 14, 1994, the respective Boards of Directors of Macy's and Federated
Department Stores, Inc. ("Federated") announced that they had reached an
agreement in principle on a merger which would be effected as part of a joint
plan of reorganization of the Macy's Debtors. (Federated's wholly-owned
subsidiary, Federated Noteholding Corporation ("FNC"), is one of the largest
secured creditors of the Macy's Debtors.) On July 29, 1994, the Macy's Debtors
and Federated (collectively, the "Plan Proponents") filed a Joint Plan of
Reorganization of R. H. Macy & Co., Inc. and Certain of its Subsidiaries in the
Bankruptcy Court, and, on August 31, 1994, the Plan Proponents filed an Amended
Joint Plan of Reorganization of R. H. Macy & Co., Inc. and Certain of its
Subsidiaries in the Bankruptcy Court (as so amended, the "Plan"). In addition,
Macy's and Federated executed and delivered an Agreement and Plan of Merger,
dated as of August 16, 1994 (the "Merger Agreement"),
7
<PAGE>
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. PROPOSED JOINT PLAN OF REORGANIZATION: MERGER WITH FEDERATED DEPARTMENT
STORES, INC.-- (CONTINUED)
providing for the merger of Federated with and into Macy's (the "Merger"), with
Macy's being the surviving corporation (the "Combined Company") and being
renamed "Federated Department Stores, Inc." upon the consummation of the Merger.
The execution and delivery of the Merger Agreement and certain provisions
thereof were approved by the Bankruptcy Court on September 8, 1994.
A principal element of the Plan is the Merger. Macy's and Federated
presently intend to seek to cause the effective time of the Merger (the
"Effective Time of the Merger"), the date on which the Plan becomes effective
(the "Effective Date of the Plan") and substantial consummation of the Plan to
occur in December 1994. The Effective Time of the Merger and the Effective Date
of the Plan will occur simultaneously. After consummation of the Merger, the
Combined Company will operate the existing businesses of Macy's and Federated.
The directors and officers of Federated immediately before the Merger will be
directors and officers of the Combined Company immediately after the Merger.
Consistent with the structure of the Merger Agreement, the transaction is to be
accounted for as a reverse acquisition in which Federated is the acquirer for
accounting purposes.
In addition to the Merger, the Plan provides for, among other things: (i)
the cancellation of all existing capital stock and other equity interests of
Macy's without payment of any consideration thereof; (ii) the cancellation of
certain indebtedness and the discharge of related claims against the Macy's
Debtors in exchange for cash, new indebtedness of the Combined Company and
certain of its subsidiaries, or new equity interests of the Combined Company;
(iii) the discharge of other prepetition claims against the Macy's Debtors; (iv)
the settlement of certain contingent claims and releases of certain claims of
the Macy's Debtors and other persons or entities; (v) the assumption, assumption
and assignment, or rejection of each executory contract and unexpired lease to
which any Macy's Debtor is a party; and (vi) the ability to enter into certain
restructuring transactions which will be designed to, among other things,
transfer to the Combined Company various centralized support functions. The Plan
provides for (a) the distribution of cash to third parties other than Federated
and its subsidiaries ("Third Parties") of approximately $.4 billion, (b) the
issuance, reinstatement, or assumption of indebtedness to Third Parties of
approximately $1.9 billion, and (c) the issuance to Third Parties of common
stock, par value $0.01 per share, of the Combined Company ("New Combined Company
Common Stock") and warrants to purchase shares of New Combined Company Common
Stock ("New Warrants") with an assumed aggregate value, solely for purposes of
developing the Plan, of approximately $1.2 billion. There can be no assurance,
however, that the New Combined Company Common Stock will have the value assumed
for purposes of developing the Plan. The assumed value of the New Combined
Company Common Stock and the New Warrants does not purport to represent an
estimate of the actual market value of the New Combined Company Common Stock or
the value of the New Warrants and is unaudited.
The Plan provides that the Combined Company, at its sole option, may: (i)
increase the amount of cash to be distributed to certain holders of claims
against the Macy's Debtors and make corresponding reductions in the respective
amounts of new debt securities or New Combined Company Common Stock to be
distributed to such claimholders, or (ii) increase the aggregate principal
amount of certain unsecured notes to be distributed pursuant to the Plan, in
exchange for a corresponding reduction in the aggregate principal amount of
certain other unsecured notes, so long as doing so would not cause the aggregate
principal amount of either series of such notes to be less than a certain
amount. In this regard, Federated has advised Macy's that it is seeking to
arrange $2.8 billion in bank credit facilities for the
8
<PAGE>
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. PROPOSED JOINT PLAN OF REORGANIZATION: MERGER WITH FEDERATED DEPARTMENT
STORES, INC.-- (CONTINUED)
Combined Company (the "New Bank Facilities"), approximately $1.7 billion of the
net proceeds of which Federated has advised Macy's it intends to apply to effect
the foregoing transactions and certain other refinancing transactions involving
other aspects of Federated's business. The consummation of the Merger Agreement
and the other transactions contemplated by the Plan are not, however,
conditioned upon the New Bank Facilities being available to the Combined
Company.
Elements of the Plan with respect to certain creditor groups are as follows:
<TABLE>
<CAPTION>
TYPE OF CLAIM PROPOSED CONSIDERATION
--------------------------------------------- ---------------------------------------------
<S> <C>
Secured and unsecured claims of The Prudential will receive (i) approximately $6
Prudential Insurance Company of America million in cash and (ii) approximately $551
("Prudential") and FNC under the Prudential million aggregate principal amount of new
Financing and certain other mortgage loans secured mortgage notes
FNC will receive (i) approximately $6 million
in cash and (ii) New Combined Company Common
Stock with an assumed value of approximately
$551 million
Secured and unsecured claims of Macy's (i) approximately $24 million in cash, (ii)
"Working Capital Bank Group" lenders under approximately $495 million aggregate
Pre-Petition Bank Credit Arrangements principal amount of indebtedness, and (iii)
New Combined Company Common Stock with an
assumed value of approximately $379 million
Secured and unsecured claims of financial (i) approximately $14 million in cash, (ii)
institutions under the "Swiss Financing" approximately $321 million aggregate
principal amount of indebtedness, and (iii)
New Combined Company Common Stock with an
assumed value of approximately $247 million
Secured and unsecured claims under the "Ten (i) approximately $119 million principal
Store Financing" amount of indebtedness, and (ii) New Combined
Company Common Stock with an assumed value of
approximately $91 million
Liquidated damages claims of "Swiss (i) approximately $1 million in cash, (ii)
Financing" Swap Breakage Claim approximately $28 million aggregate principal
amount of indebtedness, and (iii) New
Combined Company Common Stock with an assumed
value of approximately $21 million
Secured and unsecured claims under the Approximately $54 million aggregate principal
"Warehouse Financing" amount of new secured mortgage notes
Unsecured claims under or evidenced by Senior Pro rata shares of (i) approximately $35
Subordinated Debentures* million in cash, (ii) New Combined Company
Common Stock with an assumed value of
approximately $172 million, and (iii) New
Warrants with an assumed value of
approximately $80 million
</TABLE>
9
<PAGE>
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. PROPOSED JOINT PLAN OF REORGANIZATION: MERGER WITH FEDERATED DEPARTMENT
STORES, INC.-- (CONTINUED)
<TABLE>
<CAPTION>
TYPE OF CLAIM PROPOSED CONSIDERATION
--------------------------------------------- ---------------------------------------------
<S> <C>
Unsecured claims under or evidenced by Pro rata shares of (i) New Combined Company
Subordinated Debentures, due 2001* Common Stock with an assumed value of
approximately $110 million and (ii) New
Warrants with an assumed value of
approximately $59 million
Unsecured claims under or evidenced by Junior Pro rata shares of New Combined Company
Subordinated Discount Debentures* Common Stock with an assumed value of
approximately $77 million
General unsecured claims (generally includes (i) cash equal to 25.0% of the allowed amount
trade and vendor payables, litigation of the claim and (ii) a pro rata share of New
claims, and claims arising from the Combined Company Common Stock with an assumed
rejection of contracts and leases, but value of approximately $50 million based on
excludes the convenience class of unsecured the aggregate amount of claims ultimately
claims of $1,000 or less) allowed in the classes of claims included in
this class
General unsecured claims of $1,000 or less Cash equal to the allowed amount of the claim
(generally includes claims of the type
described immediately above that are either
$1,000 or less individually or that the
holder of such claims elects to reduce to
$1,000 in the aggregate)
Common and preferred stock and options To be canceled without any distributions
</TABLE>
For a description of certain creditors and pre-petition financing
arrangements, see Notes 8 and 9.
* The Proposed Consideration column includes an amount for debentures held by
Macy's Financial, Inc., a wholly-owned subsidiary of Macy's.
The Plan will not become effective unless it is first confirmed by the
Bankruptcy Court. Furthermore, there are a number of procedural and substantive
requirements to such effectiveness under the Bankruptcy Code, and certain other
conditions set forth in the Plan, which are described below, that must be
satisfied for the Plan to be confirmed. Among others, the Plan becoming
effective is conditioned upon the satisfaction or waiver of the following
conditions: (i) the aggregate amounts of specified categories of claims against
the Macy's Debtors, including certain cash payment claims, having been estimated
or determined by Bankruptcy Court orders (to the extent the Bankruptcy Court has
jurisdiction) that are not subject to any stay in amounts that do not exceed the
Macy's Debtors' estimated aggregate amounts for each such category of claims
used in connection with the development of the Plan (which condition has been
waived by Federated); (ii) the order of the Bankruptcy Court confirming the Plan
(the "Confirmation Order") being reasonably acceptable in form and substance to
each of Federated and Macy's; (iii) the date of the confirmation of the Plan
(the "Confirmation Date") having occurred no later than January 31, 1995; and
(iv) the New Combined Company Common Stock being authorized for listing on the
New York Stock Exchange, Inc. (the "NYSE") upon official notice of issuance or
accepted for quotation through the National Association of Securities Dealers
Automated Quotation System-National Market System ("NASDAQ"). Additionally,
there are certain other
10
<PAGE>
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. PROPOSED JOINT PLAN OF REORGANIZATION: MERGER WITH FEDERATED DEPARTMENT
STORES, INC.-- (CONTINUED)
conditions that must be satisfied for the Plan to be confirmed. There can be no
assurance that these conditions will be satisfied.
The obligations of Federated and Macy's to consummate the Merger are
conditioned upon, among other things: (i) the absence of any pending injunction,
order, or decree of any governmental authority restraining the Merger of the
consummation of the transactions contemplated by the Plan; (ii) the absence of
any law promulgated or enacted restraining the Merger or the transactions
contemplated by the Plan; (iii) all consents and approvals of any governmental
authority to the Merger having been obtained and remaining in effect at the
Effective Time of the Merger, other than any that if not obtained would not have
a material adverse effect on the business, financial condition, or results of
operations of the Combined Company and its subsidiaries, or any antitrust
authorizations not obtained as a result of Federated's failure to divest, hold
separate, or take other action (or its failure to agree to do any thereof) with
respect to its or the Combined Company's assets to the extent required by the
Merger Agreement; (iv) all other consents, approvals, and authorizations
required to be obtained by either party having been obtained and remaining in
effect at the Effective Time of the Merger, other than any that, if not
obtained, would not have a material adverse effect on the business, financial
condition, or results of operations of the Combined Company and its
subsidiaries, or any consents and approvals of Federated's institutional
lenders; (v) the adoption by Federated's stockholders of the Merger Agreement;
(vi) a registration statement under the Securities Act of 1933, as amended for
the shares of New Combined Company Common Stock to be issuable in connection
with the Merger having been declared effective by the Securities and Exchange
Commission and not subject to any stop order or proceeding seeking the same;
(vii) the shares of the New Combined Company Common Stock having been authorized
for listing on the NYSE upon official notice of issuance or accepted for
quotation through the NASDAQ; and (viii) the Bankruptcy Court having entered an
order confirming the Plan, at least 10 days having passed since entry of such
order and it not having been subject to any stay, and all conditions to the
Effective Date of the Plan having been satisfied or duly waived.
Federated's obligations under the Merger Agreement are further subject to
satisfaction or written waiver at or prior to the Effective Time of the Merger
of the following conditions: (i) Macy's having performed in all material
respects the covenants and agreements contained in the Merger Agreement required
to be performed by it; (ii) all representations and warranties made by Macy's in
the Merger Agreement being true and correct in all material respects; (iii) no
material adverse change having occurred in the per share price of the Federated
Common Stock following the adoption of the Merger Agreement by Federated's
stockholders; (iv) all of the consents to the Merger of Federated's
institutional lenders having been obtained by August 31, 1994 (which condition
has been waived); and (v) since the date of the Merger Agreement no material
adverse change having occurred in the business, financial condition, or results
of operations of Macy's and its subsidiaries, taken as a whole.
Macy's obligations under the Merger Agreement are further subject to the
satisfaction or written waiver at or prior to the Effective Time of the Merger
of the following conditions: (i) Federated having performed in all material
respects the covenants and agreements contained in the Merger Agreement required
to be performed by it; (ii) all representations and warranties made be Federated
in the Merger Agreement being true and correct in all material respects; (iii)
since the date of the Merger Agreement, no material adverse change having
occurred in the business, financial condition, or results of operations of
Federated and its subsidiaries, taken as whole.
11
<PAGE>
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. PROPOSED JOINT PLAN OF REORGANIZATION: MERGER WITH FEDERATED DEPARTMENT
STORES, INC.-- (CONTINUED)
In addition, the Merger Agreement may be terminated prior to the Effective
Time of the Merger under certain circumstances. If the Merger Agreement is
terminated because either party refuses to consummate the Merger in breach of
the Merger Agreement, then the breaching party will be obligated to pay to the
nonbreaching party (provided that it is not also in material breach), within
five business days of the effective date of such termination, a cash fee of
$80.0 million, which is in addition to any other rights, remedies, or damages
the nonbreaching party may have. If the Merger Agreement is terminated because
Macy's has accepted a competing offer, then Macy's will be obligated to pay
Federated, within five business days of the effective date of such termination,
a cash fee of $80.0 million as liquidated damages in lieu of any other payments.
If the Merger Agreement is terminated under certain other specified
circumstances involving the failure of the creditors of the Macy's Debtors to
accept the Plan and the consummation by Macy's of a transaction with a party
that has made a competing offer outstanding prior to such termination, Macy's
will be required to pay to Federated, within five business days of such
consummation, a cash fee of $80.0 million as liquidated damages in lieu of any
other payments, except that no such fee will be payable if Federated's
stockholders have failed to adopt the Merger Agreement or, if at the time of the
termination of the Merger Agreement, Federated is in material breach of the
Merger Agreement.
At the conclusion of a hearing held on September 29, 1994 to consider
approval of the Disclosure Statement required pursuant to the Bankruptcy Code,
the Bankruptcy Court ruled that, subject to certain modifications that are to be
made to the Disclosure Statement, an order would be signed approving the
statement.
3. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
On July 15, 1986, the registrant and certain of its subsidiaries acquired R.
H. Macy & Co., Inc., a New York corporation ("Former Macy's"), in a leveraged
buyout (the "Acquisition") through a merger of Macy Merger Corp. ("Merger
Corp."), a direct and indirect subsidiary of Macy's, with and into Former
Macy's. Macy's and certain of its subsidiaries, including Merger Corp., were
formed to effect the Acquisition. Macy's is owned by a group of current and
former management employees and other investors.
On May 3, 1988, Macy's acquired the I. Magnin and Bullock's/Bullocks
Wilshire divisions (the "New Divisions") of Federated. On that date, but prior
to the acquisition by Macy's, Federated transferred the assets of the New
Divisions to Bullock's Inc., Bullocks-Wilshire, Inc., Bullock's Specialty
Stores, Inc., and I. Magnin, Inc. These subsidiaries then became wholly-owned
subsidiaries of Macy's.
PRINCIPLES OF CONSOLIDATION
The accounts of all majority-owned subsidiaries are included in the
consolidated financial statements and all intercompany balances and transactions
are eliminated.
CASH AND CASH EQUIVALENTS
Macy's considers all short-term investments with an original or purchased
maturity of three months or less as cash equivalents.
12
<PAGE>
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
RESTRICTED CASH
Macy's has classified as restricted, certain cash and cash equivalents that
are not fully available for use in operations. These cash and cash equivalents
are primarily related to the Chapter 11 proceedings.
MERCHANDISE INVENTORIES
The value of merchandise inventories is determined by the lower of LIFO
(last-in, first-out) cost using the retail inventory method or market for about
75% of the total inventory, and the lower of FIFO (first-in, first-out) cost
using the retail inventory method or market for the balance of the inventory,
principally women's ready-to-wear and electronics.
Macy's includes in inventory the capitalization of certain indirect
purchasing, merchandise handling, and inventory storage costs to better match
sales with these related costs.
PRE-OPENING EXPENSES
Costs of opening new stores are expensed as incurred.
INCOME TAXES
Effective August 1, 1993, Macy's adopted Statement of Financial Accounting
Standards Board Statement No. 109, "Accounting for Income Taxes" ("FASB 109").
Previously, income taxes were accounted for in accordance with Accounting
Principles Board Opinion No. 11. Under the asset and liability method prescribed
by FASB 109, deferred income taxes are provided for the tax effects of temporary
differences between the financial reporting bases and the tax bases of assets
and liabilities and are measured based upon currently enacted tax laws or rates.
The cumulative effect of adopting FASB 109 at August 1, 1993 resulted in an
increase to net income of $185,340,000 (see Note 18).
INTANGIBLE ASSETS
Intangible assets, which are included in other assets, are amortized on a
straight-line basis over the lives of the assets as follows:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Customer lists.............................................. 4-8
Macy's product development.................................. 20
</TABLE>
PROPERTY AND EQUIPMENT
Depreciation is computed on a straight-line basis over the shorter of
estimated useful lives or lease terms. Capitalized leases and leasehold values
are amortized over the respective lease terms.
DEFERRED DEBT EXPENSE
Deferred debt expense is amortized over the life of the related debt.
EARNINGS/(LOSS) PER SHARE OF COMMON STOCK
Earnings/(loss) per share of common stock attributable to common
stockholders (after dividends and accretion on the Convertible Preferred Stock
(redeemable)) is computed based upon the weighted average number of shares
outstanding during the period. Fully diluted income per share is computed by
dividing net income by the weighted average number of shares outstanding during
the period assuming
13
<PAGE>
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
the conversion of Convertible Preferred Stock (redeemable) into Common Stock.
Such assumed conversion was antidilutive in fiscal years 1993 and 1992.
SINGLE BUSINESS SEGMENT
Macy's operates a retail department store business through 122 department
stores in three regional store groups and operates certain specialty and
close-out center stores. Because of the similarity of the nature of its
merchandise business, Macy's considers itself to be a single business segment.
OTHER POSTRETIREMENT BENEFITS
Statement of Financial Accounting Standards Board Statement No. 106,
"Employers Accounting for Postretirement Benefits Other Than Pensions" ("FASB
106"), was adopted on August 1, 1993. This statement requires that employers
record the expected cost of postretirement benefits other than pensions during
the employees' active years of service. As of August 1, 1993, the accumulated
postretirement obligation was approximately $204,000,000. The registrant is
recording this obligation through amortization over a 20-year period. The
incremental non-cash expense associated with the adoption of FASB 106 for the
year ended July 30, 1994 was $20,681,000, including the amortization of the
accumulated postretirement obligation of $10,195,000 (see Note 19).
CHANGE IN FISCAL YEAR
Macy's changed its fiscal year end from the Saturday closest to July 31 to
the Saturday closest to January 31 effective for the year beginning July 31,
1994.
RECLASSIFICATIONS
Certain reclassifications have been made to prior years' financial
statements to conform with classifications used in the current year.
4. MERCHANDISE INVENTORIES
If inventories had been valued at the lower of FIFO cost or market,
inventories would have increased by $119,235,000 and $102,563,000 at July 30,
1994 and July 31, 1993, respectively.
5. INTANGIBLE ASSETS
Intangible assets are included in other assets as follows:
<TABLE>
<CAPTION>
JULY 30, JULY 31,
1994 1993
----------- ------------
<S> <C> <C>
Customer lists................................. $11,295,000 $135,409,000
Macy's product development..................... 43,928,000 38,223,000
----------- ------------
55,223,000 173,632,000
Less: accumulated amortization................. 25,812,000 130,449,000
----------- ------------
$29,411,000 $ 43,183,000
----------- ------------
----------- ------------
</TABLE>
Fully amortized intangible assets were offset against the related
accumulated amortization.
14
<PAGE>
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
<TABLE>
<CAPTION>
JULY 30, JULY 31,
1994 1993
------------ ------------
<S> <C> <C>
Merchandise, expenses, and construction
accounts payable.............................. $657,410,000 $686,677,000
Accrued interest.............................. 399,000 606,000
Accrued taxes, other than income taxes........ 74,944,000 81,851,000
Accrued wages................................. 20,667,000 26,049,000
Customers' deposits and miscellaneous......... 87,747,000 79,309,000
------------ ------------
$841,167,000 $874,492,000
------------ ------------
------------ ------------
</TABLE>
7. SHORT-TERM BORROWINGS
POST-PETITION FINANCING (SEE ALSO NOTE 9)
Pursuant to orders of the Bankruptcy Court entered on January 29, 1992 and
February 13, 1992, the registrant obtained a debtor-in-possession financing
arrangement under a Revolving Credit and Guaranty Agreement dated as of January
27, 1992 (as subsequently amended through March 31, 1993, the "Post-Petition
Credit Agreement"), among Macy's, as Borrower, each of the other Macy's Debtors,
as guarantors, Chemical Bank, as administrative agent, and Bankers Trust
Company, as co-agent, and other financial institutions to become parties
thereto. The Post-Petition Credit Agreement established a working capital
facility consisting of revolving credit loans and letters of credit in the
aggregate maximum amount of $600,000,000, inclusive of a sub-limit of
$250,000,000 for standby and documentary letters of credit of which no more than
$30,000,000 could be used for standby letters of credit. The Post-Petition
Credit Agreement was scheduled to terminate pursuant to its original terms upon
the earlier of (i) February 28, 1994 or (ii) substantial consummation of a plan
of reorganization of Macy's or certain of its subsidiaries. Borrowings under the
working capital facility may be used to fund working capital, inventory
purchases, capital expenditures, and for other general corporate purposes of the
Macy's Debtors. The Post-Petition Credit Agreement includes restrictions on
capital expenditures and certain other payments, as well as covenants relating
to EBITDA (earnings before interest, taxes, depreciation, and amortization as
defined within the Post-Petition Credit Agreement).
On August 12, 1993 the Post-Petition Credit Agreement was amended and
restated on similar terms pursuant to an Amended and Restated Credit and
Guaranty Agreement, among Macy's, as Borrower, the Macy's Debtors, as
guarantors, Chemical Bank, as administrative agent, Bankers Trust Company, as
co-agent, and other financial institutions party thereto (the "Amended and
Restated Post-Petition Credit Agreement"), which agreement was approved by a
Bankruptcy Court order dated September 8, 1993. Under the Amended and Restated
Post-Petition Credit Agreement, Macy's working capital facility (the "Working
Capital Facility") consisting of revolving credit loans and letters of credit
was reduced from a maximum of $600,000,000 to $550,000,000, inclusive of a
sublimit of $250,000,000 for standby and documentary letters of credit of which
no more than $30,000,000 may be used for standby letters of credit. In August
1994, Macy's voluntarily reduced the Working Capital Facility to $450,000,000
reflecting its reduced borrowing requirements thereunder. The Amended and
Restated Post-Petition Credit Agreement terminates upon the earlier of (i)
August 1, 1995 or (ii) the substantial consummation of a plan of reorganization
of Macy's or certain of its subsidiaries.
Claims in respect of indebtedness incurred by the Macy's Debtors under the
Amended and Restated Post-Petition Credit Agreement are afforded superpriority
administrative expense claim status pursuant to applicable provisions of the
Bankruptcy Code.
15
<PAGE>
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. SHORT-TERM BORROWINGS--(CONTINUED)
The Amended and Restated Post-Petition Credit Agreement provides that
advances made under the Working Capital Facility will bear interest at a rate of
1.5% per annum in excess of Chemical Bank's Alternative Base Rate ("ABR") (which
was 7.25% at July 30, 1994), or at Macy's option, at a rate of 2.5% per annum in
excess of the reserve adjusted London Interbank Offered Rate ("LIBOR") for
interest periods of one, three, or six months (which was 4.50%, 4.875%, or
5.3125%, respectively, at July 30, 1994). Interest on ABR loans and three and
six month LIBOR loans are payable quarterly and interest on one month LIBOR
loans is payable at maturity.
Under the Amended and Restated Post-Petition Credit Agreement, Macy's is
obligated to pay a commitment fee of 1/2 of 1% per annum on the unused portion
of the Working Capital Facility, a letter of credit fee, and certain other fees.
There were no outstanding revolving credit borrowings and $118,775,000 of
letters of credit outstanding under the Working Capital Facility at July 30,
1994. Unamortized deferred debt expense of $2,437,000 was included in the
caption "Other Assets" at July 30, 1994. At July 31, 1993 outstanding revolving
credit borrowings and letters of credit under the Working Capital Facility were
$65,900,000 and $116,905,000, respectively (excluding unamortized deferred debt
expense of $3,202,000).
8. OBLIGATIONS SUBJECT TO SETTLEMENT UNDER REORGANIZATION PROCEEDINGS
Obligations of the Macy's Debtors that are expected to be settled as part of
a plan of reorganization are separately classified in the Consolidated
Statements of Financial Condition as of July 30, 1994 and are as follows:
<TABLE>
<S> <C>
Accounts payable and accrued liabilities................... $ 701,650,000
Accrued interest on long-term debt......................... 480,541,000
Secured debt (Note 9)...................................... 2,318,931,000
Unsecured debt (Note 9).................................... 1,265,611,000
Obligations under capitalized leases (Note 20)............. 11,032,000
Convertible Preferred Stock (redeemable) (Note 10)......... 637,315,000
Other liabilities.......................................... 224,730,000
--------------
$5,639,810,000
--------------
--------------
</TABLE>
Obligations Subject to Settlement Under Reorganization Proceedings include
substantially all of Macy's pre-petition short and long-term debt. As discussed
in Note 1, payments of these obligations are stayed while the Macy's Debtors
continue to operate as debtors-in-possession.
The increase in Obligations Subject to Settlement Under Reorganization
Proceedings from July 31, 1993 to July 30, 1994 was primarily due to the accrual
of interest expense on certain pre-petition secured debt.
Generally, interest on pre-petition debt does not accrue after the
commencement of the Chapter 11 case. If the debts are secured by property with a
fair market value that is greater than the amount of the debt, interest may
accrue up to the value of the collateral. Through substantially all of fiscal
1994, Macy's accrued interest on its secured debt pending obtaining an estimate
of the fair market value of the property securing such debt. Following
negotiations with representatives of the various secured lenders and the
development of the Plan in July, Macy's revised its estimates for the
post-petition accrued interest that would be paid for fiscal 1994 and prior
years upon confirmation of the Plan resulting in the secured debt plus
post-petition interest through July 30, 1994 equaling the estimated
16
<PAGE>
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. OBLIGATIONS SUBJECT TO SETTLEMENT UNDER REORGANIZATION
PROCEEDINGS--(CONTINUED)
amount due for such debt and interest as of such date under the Plan.
Accordingly, post-petition interest of $61,250,000 (contractual interest) with
respect to fiscal 1994 and $57,460,000 with respect to prior years and relating
to the Swiss Financing, the Ten Store Financing, and the Warehouse Financing
(see Note 9) was reversed through reductions in interest expense and
reorganization items, respectively. Interest expense on certain other
pre-petition secured debt continues to be accrued but remains subject to
settlement. Such accrual of interest on secured indebtedness is being recorded
at the interest rates applicable under the respective loan agreements without
regard to default and penalty provisions contained therein (see Note 14).
Macy's has ceased accruing interest expense on its unsecured debt.
Contractual interest not recorded on such unsecured debt aggregated
$215,233,000, $203,518,000, and $99,442,000 for the fiscal years ended July 30,
1994, July 31, 1993, and August 1, 1992.
Numerous claims have been asserted in respect of various pre-petition
obligations, which claims individually or in the aggregate may be material and
may not currently be reflected as obligations subject to settlement. The last
day on which these claims could be filed against the Macy's Debtors, with
certain exceptions, was December 15, 1992, and over 17,000 claims aggregating an
amount substantially in excess of the amounts reported in the Consolidated
Statements of Financial Condition under the caption Obligations Subject to
Settlement Under Reorganization Proceedings were filed by such date. Based on
reviews through July 30, 1994, Macy's believes that a number of these claims are
duplicative of and/or supersede claims previously asserted. In addition, claims
have been filed which do not state a specific claim amount or as to which a
specific claim amount is not readily determinable. Pursuant to Bankruptcy Court
orders entered in 1993 and 1994, certain exact duplicate claims and late claims
were expunged. Claims will continue to be reviewed and analyzed by Macy's as
part of the claims reconciliation process and objections filed as required. As
this review process continues, the aggregate amount included in the estimate of
pre-petition date obligations subject to settlement may increase or otherwise be
adjusted to reflect the ongoing analyses of claims filed and the aggregate
amounts which may be allowed in respect thereof. Macy's has received claims
relating to termination of various interest rate protection agreements on
pre-petition liabilities aggregating approximately $138,000,000. Provisions for
$54,115,000 and $83,695,000 were recorded in fiscal 1992 and 1993 and have been
included in Obligations Subject to Settlement Under Reorganization Proceedings.
In 1994, $33,695,000 of the 1993 provision was reversed based on the comparison
of such provision and the amount included in the Plan. This reversal was
included as a reduction of Reorganization Items--net in the Consolidated
Statements of Operations for fiscal year 1994.
Commencing on the Chapter 11 filing date, Macy's ceased accruing dividends
on its Convertible Preferred Stock (redeemable) and has included the Convertible
Preferred Stock (redeemable) and the cumulative accrued but unpaid dividends
prior to the filing date on such stock in Obligations Subject to Settlement
Under Reorganization Proceedings. Under applicable bankruptcy law, the holders
of the Convertible Preferred Stock of the registrant are not considered
creditors.
The unsecured debt amount included in Obligations Subject to Settlement
Under Reorganization Proceedings does not include $5,000,000 of 14 1/2% Senior
Subordinated Debentures, $241,931,000 of 14 1/2% Subordinated Debentures, and
$187,769,000 of 16 1/2% Junior Subordinated Discount Debentures purchased in
fiscal 1991 by Macy Financial, Inc. ("MFI"), a wholly-owned subsidiary of Macy's
and also a debtor-in-possession. The capital stock of MFI, as well as such
debentures, were pledged to the pre-petition banks under the pre-petition Macy
Bank Agreement (see Note 9).
17
<PAGE>
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. FINANCING ARRANGEMENTS
The financing arrangements consist of the following:
<TABLE>
<CAPTION>
AS OF JULY 30, 1994 AS OF JULY 31, 1993
-------------------------------------------- --------------------------------------------
LESS LESS
UNAMORTIZED UNAMORTIZED
DEFERRED NET DEFERRED NET
CARRYING VALUE DEBT EXPENSE CARRYING VALUE CARRYING VALUE DEBT EXPENSE CARRYING VALUE
-------------- ------------ -------------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Post-Petition Financing
Working Capital Facility (Note 7).... $ -- $ -- $ -- $ 65,900,000 $ 3,202,000 $ 62,698,000
-------------- ------------ -------------- -------------- ------------ --------------
-------------- ------------ -------------- -------------- ------------ --------------
Pre-Petition Financings
Secured Debt:
Macy Revolving Credit Facility...... $ 128,358,000 $ -- $ 128,358,000 $ 128,358,000 $ 3,011,000 $ 125,347,000
Prudential Financing................ 802,161,000 16,891,000 785,270,000 811,672,000 20,371,000 791,301,000
Swiss Financing..................... 553,750,000 9,830,000 543,920,000 553,750,000 12,288,000 541,462,000
Ten Store Financing................. 180,761,000 1,683,000 179,078,000 180,761,000 2,201,000 178,560,000
Warehouse Financing................. 53,200,000 1,363,000 51,837,000 53,200,000 1,497,000 51,703,000
Six-Year Term Loan.................. 170,000,000 -- 170,000,000 170,000,000 -- 170,000,000
Purchase Note....................... 401,408,000 -- 401,408,000 401,408,000 858,000 400,550,000
Mortgage Notes...................... 62,190,000 70,000 62,120,000 62,350,000 98,000 62,252,000
Less imputed interest as a result
of the Acquisition.............. (3,060,000) -- (3,060,000) (3,292,000) -- (3,292,000)
-------------- ------------ -------------- -------------- ------------ --------------
Total Pre-Petition Secured
Debt.......................... 2,348,768,000 29,837,000 2,318,931,000 2,358,207,000 40,324,000 2,317,883,000
-------------- ------------ -------------- -------------- ------------ --------------
Unsecured Debt:
Senior Subordinated Debentures...... 379,000,000 -- 379,000,000 379,000,000 -- 379,000,000
Subordinated Debentures............. 383,434,000 -- 383,434,000 383,434,000 -- 383,434,000
Junior Subordinated Discount
Debentures........................ 503,177,000 -- 503,177,000 503,177,000 -- 503,177,000
-------------- ------------ -------------- -------------- ------------ --------------
Total Pre-Petition Unsecured
Debt.......................... 1,265,611,000 -- 1,265,611,000 1,265,611,000 -- 1,265,611,000
-------------- ------------ -------------- -------------- ------------ --------------
$3,614,379,000 $29,837,000 $3,584,542,000 $3,623,818,000 $40,324,000 $3,583,494,000
-------------- ------------ -------------- -------------- ------------ --------------
-------------- ------------ -------------- -------------- ------------ --------------
</TABLE>
Prior to the commencement of the Chapter 11 cases, Macy's entered into the
following financing arrangements. The descriptions of the following financing
arrangements are based on the original contractual terms and maturities. As a
result of the commencement of the Chapter 11 cases, Macy's is in default of
these financing arrangements and the obligations in respect thereof remain
subject to settlement. (See Note 1).
PRE-PETITION BANK CREDIT ARRANGEMENTS
Prior to the commencement of the Chapter 11 cases, Macy's was party to a
Bank Credit Agreement which was originally dated as of July 10, 1986 and was
amended and restated as of April 27, 1988 (as subsequently amended the "Macy
Bank Agreement"). The Macy Bank Agreement established a Macy's revolving working
capital line of credit ("Macy Revolving Credit Facility"), a six-year term loan,
and an Acquisition Letter of Credit.
MACY REVOLVING CREDIT FACILITY
The Macy Revolving Credit Facility provided a six-year revolving working
capital line of credit subject to certain sublimits, not to exceed $587,700,000.
Borrowings as of July 30, 1994 and July 31, 1993 were $128,358,000 (excluding
unamortized deferred debt expense of $3,011,000 as of July 31,
18
<PAGE>
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. FINANCING ARRANGEMENTS--(CONTINUED)
1993), and are included in Obligations Subject to Settlement Under
Reorganization Proceedings. The Macy Revolving Credit Facility was a six-year
facility and would have terminated in April 1994. The Macy Revolving Credit
Facility bears interest at a rate per annum equal to 1.25% plus the Base Rate (a
floating rate of interest publicly announced by Chemical Bank, or, at Macy's
option, 2.25% plus the Eurodollar Rate (as defined in the Macy Bank Agreement,
which definition gives weight to the Eurodollar Reserve Percentage as therein
defined). Interest is computed on the basis of a year of 360 days and is payable
monthly in arrears for Base Rate borrowings and at the end of an Interest Period
(as defined in the Macy Bank Agreement) for Eurodollar Rate borrowings. The
facility was secured by the capital stock of certain of Macy's U.S.
subsidiaries, certain receivables, certain tangible personal property (other
than inventory) and general intangibles, junior liens on certain Macy's stores,
and substantially all of Macy's other real property.
SENIOR REAL ESTATE DEBT
Senior real estate debt includes the following:
a) Prudential Financing
In 1986, Macy's and various subsidiaries of Macy's received $800,000,000 of
mortgage financing provided by The Prudential Insurance Company of America
("Prudential Financing"). These loans are, by their terms, nonrecourse
participating loans secured by the first or second mortgages on 68 of Macy's
department stores; however, under the Bankruptcy Code, by virtue of Macy's
Chapter 11 cases, these loans may have become recourse loans. Each of the loans
has a term of 15 years and bears interest at a 12% rate (the "Note Rate"). The
lender receives semi-annual cash payments equal to the greater of (i) 9% per
annum of the loan balance (including accrued interest) for the first three
years, stepping up 1% each year thereafter until such rate becomes 12% (in the
sixth year), and thereafter remaining at 12% until maturity, or (ii) a
percentage in the range of 1.33% to 1.37% of each of the four regional store
group subsidiaries' (as of the date of the Acquisition) annual gross retail
sales (such greater amount being referred to as the "Pay Rate"). The dollar
amount of any excess of the Note Rate over the Pay Rate will be added to the
loan balance and will bear interest at the Note Rate (an "Accrual"). In the
event that the Pay Rate exceeds the Note Rate, the Pay Rate is capped at 13% of
the loan balance (including accrued interest) on a divisional basis (i.e.,
regional store group subsidiaries). To the extent the Pay Rate exceeds the Note
Rate, such excess may be utilized to pay down the Accrual balance with any
further excess being paid as additional interest. At maturity, the lender was
scheduled to receive additional interest based on a percentage of the increase
in real estate value (determined on the basis of retail sales) of the applicable
store securing such debt. The accrual of additional interest was recorded and
compounded annually as noncash interest until July 1991 (see Note 14).
On December 31, 1993, FNC acquired from the Prudential Insurance Company of
America ("Prudential") 50% of certain claims of Prudential against the Macy's
Debtors arising under the Prudential Financing in the original principal amount
of $800 million and certain other mortgage loans in the aggregate original
principal amount of approximately $21 million (such amount is included in
Mortgage Notes) (collectively, the "Prudential Claims").
19
<PAGE>
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. FINANCING ARRANGEMENTS--(CONTINUED)
During fiscal 1994, Macy's repaid $9,511,000 of the outstanding balance of
the Prudential Financing from the proceeds of two stores closed and sold
subsequent to the commencement of the Chapter 11 cases.
b) Swiss Financing
In 1988 and 1989, various subsidiaries of Macy's received approximately
$565,000,000 of mortgage financing provided by Swiss Bank Corporation and
certain other financial institutions ("Swiss Financing"). These loans are
secured by certain real estate owned by such subsidiaries and bear interest at
an overall interest rate cost of approximately 10.4%. The repayment of the
outstanding principal is due in June 1998.
c) Ten Store Financing
In 1987, various subsidiaries of Macy's received $180,000,000 of proceeds
from nonrecourse indebtedness secured by ten stores (the "Ten Store Financing")
through the issuance of commercial paper by Macy Special Real Estate Capital
Corp. ("Special Real Estate"), a wholly-owned special purpose subsidiary of
Macy's. The assets of Special Real Estate will only be available to Macy's after
Special Real Estate's obligations to its creditors have been satisfied.
Citibank, N.A. issued a letter of credit in support of the commercial paper. The
registrant used $55,000,000 of the proceeds to make a prepayment on the amount
then outstanding under its former six-year term loan and repurchased certain
subordinated indebtedness at an aggregate purchase price of approximately
$45,000,000. Macy's entered into fixed rate protection agreements in respect of
this indebtedness, the effect of which, together with a related option, provides
Macy's with an overall interest rate cost of approximately 10% per annum. The
payment of the outstanding principal amount is due in May 1997.
As a result of the commencement of the Chapter 11 cases, Special Real Estate
ceased issuing commercial paper. Pursuant to a credit support arrangement
entered into in 1987, the outstanding commercial paper was retired through the
proceeds of the repurchase by an affiliate of Citibank, N.A. of a participation
held by Special Real Estate in the loans evidencing the Ten Store Financing.
Additionally, the fixed rate protection agreements were terminated.
d) Warehouse Financing
Concurrently with the sale of accounts and receivables to General Electric
Capital Corp. ("GE Capital"), GE Capital made a 15-year loan to three
subsidiaries of Macy's in an aggregate principal amount of $44,100,000. This
loan bore interest until October 15, 1991 at an annual rate of 10.5%. Commencing
June 10, 1992, this loan amortizes ratably over its remaining 14 years. On
October 15, 1991, an additional loan of $9,100,000 was made and the annual
interest rate changed to 10.44% on the aggregate principal outstanding of
$53,200,000. These loans are secured by certain real estate owned by the
borrowers and generally are non-recourse except with respect to payment of
interest and certain environmental matters, which recourse obligations have been
guaranteed by Macy's.
SIX-YEAR TERM LOAN
The six-year term loan bears interest at a rate per annum equal to 1.25%
plus the Base Rate or, at Macy's option, 2.25% plus the Eurodollar Rate. Such
interest is computed on the basis of a year of 360
20
<PAGE>
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. FINANCING ARRANGEMENTS--(CONTINUED)
days and is payable monthly in arrears for Base Rate borrowings and at the end
of an Interest Period (as defined in the Macy Bank Agreement) for Eurodollar
Rate borrowings, and is subject to reduction based on terms and conditions set
forth in the Macy Bank Agreement. The principal was payable in semi-annual
installments.
The six-year term loan is secured by the capital stock of certain of Macy's
U.S. subsidiaries, certain receivables, certain tangible personal property
(other than inventory) and general intangibles, junior liens on certain Macy's
stores, and substantially all of Macy's other real property.
The Macy Bank Agreement gave the banks the option under certain
circumstances to require the termination of Macy's overfunded pension plan upon
an event of default in respect of specific operating ratios and cash flow
coverage requirements. As a result of the Chapter 11 filings, Macy's is in
default of the Macy Bank Agreement and the banks' remedies under these
agreements are stayed.
PURCHASE NOTE
As part of the consideration paid for the acquisition of the New Divisions,
Macy's issued a $400,000,000 Note to Federated which was assigned to a third
party. The Note was due and payable in three equal installments beginning May 3,
1997. The Note bore interest at a rate per annum equal to the three month LIBOR
Rate plus .5% or at the Alternative LIBOR Rate (both defined in the Note).
Interest is computed on the basis of a year of 360 days and is payable quarterly
in arrears. As part of the Macy Bank Agreement, an Acquisition Letter of Credit
was issued in support of the Note for a period of six years. Additionally,
Macy's entered into fixed rate protection agreements in respect of the
indebtedness under the Note, the effect of which, together with the cost of the
Letter of Credit, would provide Macy's with an annual overall interest rate cost
of 12.65%.
As a result of the commencement of the Chapter 11 cases, the Acquisition
Letter of Credit was drawn for the beneficiary thereof in the amount of
$400,000,000 plus accrued interest in satisfaction of the Purchase Note.
Pursuant to the terms of the Macy Bank Agreement, Macy's is obligated to
reimburse the lenders who funded the Acquisition Letters of Credit.
Additionally, the fixed rate protection agreements were terminated as a result
of the commencement of the Chapter 11 case.
At July 30, 1994, Macy's is currently recording interest at an annual rate
of 7.25% on the obligations under the Macy Bank Agreement.
SENIOR SUBORDINATED DEBENTURES
The senior subordinated debentures bore interest at 14.5% per annum, payable
semi-annually, and mature on October 15, 1998. Such debentures are redeemable at
Macy's option on or after October 15, 1991, initially at 107.5% of their
principal amount, declining to 100% on or after October 15, 1996, and will be
entitled to the benefit of a sinking fund beginning October 15, 1994, in annual
installments of $80,000,000, calculated to retire 80% of their principal amount
prior to maturity.
In 1991, Macy's or a subsidiary repurchased $5,000,000 principal amount of
senior subordinated debentures from a portion of the proceeds received in the
issuance of additional Convertible Preferred Stock. In 1988, Macy's repurchased
$16,000,000 principal amount of senior subordinated debentures from a portion of
the proceeds of the Ten Store Financing.
21
<PAGE>
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. FINANCING ARRANGEMENTS--(CONTINUED)
As a result of the commencement of the Chapter 11 cases, Macy's has ceased
accruing interest expense on its unsecured debt. Therefore, interest expense on
the senior subordinated debentures has not been accrued after January 27, 1992.
SUBORDINATED DEBENTURES
The subordinated debentures bore interest at 14.5% per annum, payable
semi-annually, and mature on November 15, 2001. Such debentures are redeemable
at Macy's option on or after November 15, 1991, initially at 105% of their
principal amount, declining to 100% on or after November 15, 1993, and will be
entitled to the benefits of a sinking fund in annual installments of
$130,000,000 beginning November 15, 1997, calculated to retire 80% of their
principal amount prior to maturity.
In 1991, Macy's or a subsidiary repurchased $247,431,000 principal amount of
subordinated debentures from a portion of the proceeds received in the issuance
of additional Convertible Preferred Stock. In 1988, Macy's repurchased
$19,135,000 principal amount of subordinated debentures from a portion of the
proceeds of the Ten Store Financing.
As a result of the commencement of the Chapter 11 cases, Macy's has ceased
accruing interest expense on its unsecured debt. Therefore, interest expense on
the subordinated debentures has not been accrued after January 27, 1992.
JUNIOR SUBORDINATED DISCOUNT DEBENTURES
Macy's issued $910,150,000 principal amount of junior subordinated discount
debentures maturing on November 15, 2006 for proceeds of $300,003,000. Such
debentures bear no interest for the first seven years and bear interest at 16.5%
payable semi-annually commencing November 15, 1993. The discount rate for these
debentures has been assumed to provide a yield to maturity of approximately
16.5% on a semi-annual basis. Such debentures are entitled to the benefits of a
sinking fund beginning November 15, 2002, in annual installments of
$182,030,000, calculated to retire 80% of the issue prior to maturity. These
debentures are redeemable at Macy's option at any time at 100% of their
principal amount.
In 1991, Macy's or a subsidiary repurchased $253,822,000 face amount
($170,814,000 accreted value) of junior subordinated discount debentures from a
portion of the proceeds received in the issuance of additional Convertible
Preferred Stock. In 1988, Macy's repurchased $21,900,000 face amount of junior
subordinated discount debentures from a portion of the proceeds of the Ten Store
Financing.
As a result of the commencement of the Chapter 11 cases, Macy's has ceased
accruing interest expense on its unsecured debt. Therefore, interest expense on
the junior subordinated discount debentures has not been accrued after January
27, 1992.
MORTGAGE NOTES
The average rate of interest approximated 8.6% and 8.8% (ranging from 4.7%
to 12.0%) for 1994 and 1993.
22
<PAGE>
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. FINANCING ARRANGEMENTS--(CONTINUED)
The net book value of the property subject to mortgages amounted to
approximately $2,102,390,000 at July 30, 1994. Such net book value may not
reflect the fair market value of such property.
* * *
Substantially all assets, other than cash and inventory, are pledged as
collateral at July 30, 1994.
INTEREST RATE PROTECTION ARRANGEMENTS
Prior to the Petition Dates, Macy's had entered into interest rate swap and
cap arrangements in the management of interest rate exposure. In 1992, the
differential to be paid or received was accrued as an interest rate charge and
was recognized as an adjustment to interest expense. All interest rate
protection arrangements were terminated at the commencement of the Chapter 11
cases as a result of the default provisions under the loan arrangements.
10. PREFERRED STOCK
Macy's certificate of incorporation provides for 25 million authorized
shares of Preferred Stock, par value $1.00 per share, of which nine million
shares constitutes Convertible Participating Preferred Stock (redeemable)
("Series I Preferred Stock"), one million shares constitutes Convertible
Participating Preferred Stock Series II (redeemable) ("Series II Preferred
Stock"), and seven million shares constitutes Convertible Participating
Preferred Stock Series III (redeemable) ("Series III Preferred Stock"). (Series
I Preferred Stock, Series II Preferred Stock, and Series III Preferred Stock are
collectively referred to in these notes as "Preferred Stock" and in the
consolidated financial statements as "Preferred Stock").
The certificate of incorporation authorizes the Board of Directors to fix
the conditions and terms of shares of Preferred Stock prior to their issuance.
On July 15, 1986, Macy's sold 7,494,465 shares of Series I Preferred Stock with
a Base Liquidation Preference of $39.62 per share. Between August 1990 and
February 1991, Macy's sold 211,506 shares of Series II Preferred Stock with a
Base Liquidation Preference of $159.05 per share and, between December 1990 and
April 1991, 5,298,330 shares of Series III Preferred Stock with a Base
Liquidation Preference of $31.81 per share. All sales of Preferred Stock have
been made in private placements.
The right to convert Preferred Stock at the option of the holder into Common
Stock on a one-to-one basis began on July 15, 1988 and ended for the Series I
Preferred Stock and Series II Preferred Stock on July 15, 1993; such conversion
right with respect to the Series III Preferred Stock continues until December
18, 1997. No preferred shares have been converted into Common Stock. The
Preferred Stock is redeemable at the option of Macy's after the end of
applicable optional conversion period ("Conversion Expiration Date") at various
percentages of the Base Liquidation Preference of the particular series until
mandatory redemption on the thirteenth anniversary of the Conversion Expiration
Date.
23
<PAGE>
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. PREFERRED STOCK--(CONTINUED)
The difference between the carrying value of certain of the Preferred Stock
Series I at date of issue and the mandatory redemption value was recorded
through periodic accretions using the interest method until the commencement of
the Chapter 11 case. The related charge flowed through the deficiency in net
assets.
Except for special class voting rights of the Preferred Stock, each share of
Preferred Stock entitles the holder thereof to one vote on all matters
whatsoever which may be the subject of proper action by stockholders of Macy's
together with the holders of Common Stock voting as a single class, subject to
the terms of the Non-Management Stockholders' Agreement dated as of July 15,
1986, as amended, and of the Voting Trust Agreement dated as of July 15, 1986 in
respect of certain Common Stock.
Cumulative quarterly dividends (the "Preferred Dividend") were provided for
at an annual dividend rate of 8% of the Base Liquidation Preference for the
particular series involved, as and when declared by the Board of Directors; and
also, a dividend (the "Participating Dividend"), participating pari passu with
the Common Stock in the payment of Common Stock dividends in an amount equal to
the product of (i) 25% multiplied by a fraction, the numerator of which is the
number of shares of Preferred Stock then outstanding and the denominator of
which is the number of shares of Preferred Stock outstanding at July 15, 1986,
multiplied by (ii) the aggregate amount declared available for dividends on the
Common Stock and Preferred Stock after payment of the Preferred Dividend. It is
provided that Macy's may not pay dividends to the Common stockholders, unless
all accrued Preferred Dividends have been paid or declared and provided for.
Any unpaid accrued Preferred and Participating Dividends are forfeitable
upon conversion of Preferred Stock. The holders of Preferred Stock are subject
to a Non-Management Stockholders' Agreement dated as of July 15, 1986, as
amended, which affects the exercise of various rights, including the voting and
transferability of Preferred Stock and the Common Stock into which such
Preferred Stock is convertible.
Commencing on the Chapter 11 filing date, Macy's ceased accruing dividends
on its Preferred Stock (redeemable) and has included the Preferred Stock
(redeemable) and the cumulative accrued but unpaid dividends prior to the filing
date on such stock in Obligations Subject to Settlement Under Reorganization
Proceedings. For purposes of the Bankruptcy Code, the holders of the Preferred
Stock of Macy's are not considered creditors. The Plan provides for cancellation
of all existing capital stock and other equity interests of Macy's without
payment of any consideration therefor.
11. COMMON STOCK
On July 15, 1986, Macy's sold 1,750,000 shares of its Common Stock for
either cash and/or the exchange of common shares of Former Macy's. In connection
with their purchase of Common Stock, each purchaser of Common Stock entered into
a Common Stock Subscription Agreement or a like agreement which contained
certain transfer restrictions until the end of such agreements on July 15, 1996
or earlier under certain circumstances and, also, provisions regarding such
stockholder's rights and/or obligations to sell the Common Stock back to Macy's
or its designee upon termination of such stockholder's employment with Macy's or
its affiliates (until July 15, 1993, generally in the Common Stock Subscription
Agreements and until July 15, 1996 in "Stock Purchase, Agency and Restriction
24
<PAGE>
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. COMMON STOCK--(CONTINUED)
Agreements"). The holders of such Common Stock also entered into a Voting Trust
Agreement dated as of July 15, 1986 pursuant to which a ten-year voting trust
was established.
Dividends on Common Stock are provided for, as and when declared by the
Board of Directors subject to the payment of the Preferred Dividends (see Note
10) and the restrictions as to the payment of dividends included in certain of
the debt agreements. No dividends have been declared on Macy's Common Stock.
The Plan provides for cancellation of all existing capital stock and other
equity interests of Macy's without any payment of consideration therefor.
12. 1987 KEY EXECUTIVE STOCK INCENTIVE PROGRAM
On June 15, 1987, the Board of Directors approved the 1987 Key Executive
Stock Incentive Program (the "1987 Program"). In view of Macy's Chapter 11 case,
the 1987 Program, which is described below, has become inactive. The 1987
Program consists of (i) the 1987 Participation Stock Option Plan, which provides
for the grant of stock options not intended to qualify as incentive stock
options under the Internal Revenue Code of 1986, as amended ("PSOs"), and (ii)
the 1987 Stock Award Plan, which provides for awards of Common Stock ("Awards").
PSOs, unless determined otherwise, are exercisable in certain specified
installments and for a period of seven years; the exercise price of each share
granted under a PSO is determined at the date of grant. Awards may or may not be
subject to certain terms, conditions, and restrictions and/or a purchase price.
The maximum number of shares of Common Stock subject to the 1987 Program is the
number of Reserved Management Shares (i.e., 92,105 unissued shares) plus such
shares as shall be acquired by Macy's from employees or former employees or
their permitted transferees pursuant to rights or obligations of Macy's under
Common Stock subscription agreements or like agreements. The 1987 Program is
designed to subject all Common Stock issued under its Plans (a) to the rights
and restrictions on the Common Stock of Macy's currently operative as to
holdings of existing Management Investors in July 1986 and (b) to the required
inclusion of all Common Stock under the Voting Trust Agreement.
For the years ended July 30, 1994 and July 31, 1993, the number of shares
subject to options that were outstanding were 187,525. Stock options were held
by 196 individuals at July 30, 1994. The exercise price for all shares under
option is $20 per share. The Plan provides for cancellation of all existing
capital stock and other equity interests of Macy's without payment of any
consideration therefor.
13. NET RETAIL SALES
Net retail sales include sales from licensed departments of $65,136,000,
$67,004,000, and $83,038,000 for fiscal years 1994, 1993, and 1992,
respectively.
25
<PAGE>
R.H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. INTEREST EXPENSE--NET
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED
------------------------------------------------
JULY 30, 1994 JULY 31, 1993 AUGUST 1, 1992
------------- ------------- --------------
<S> <C> <C> <C>
Cash interest expense:*
DIP Facility interest......................... $ 7,826,000 $ 8,086,000 $ 2,346,000
Mortgage interest............................. 5,328,000 5,495,000 6,767,000
Imputed interest on capitalized leases........ 6,904,000 4,225,000 3,715,000
Macy Revolving Credit Facility................ 9,734,000 9,409,000 19,443,000
Six-year Term Loan............................ 12,893,000 12,462,000 14,221,000
Senior Subordinated Debentures................ -- -- 26,996,000
Subordinated Debentures....................... -- -- 27,641,000
Senior Real Estate Debt....................... 97,517,000 146,862,000 178,986,000
Purchase Note................................. 30,442,000 29,094,000 32,465,000
Other interest expense........................ 1,648,000 2,447,000 991,000
------------- ------------- --------------
Total cash interest....................... 172,292,000 218,080,000 313,571,000
------------- ------------- --------------
Non-cash interest expense:
Amortization of the discount on the Junior
Subordinated Discount Debentures............ -- -- 37,710,000
Additional Interest on Senior Real Estate
Debt-- participating loans**................ -- (26,212,000) (39,448,000)
Interest expense associated with deferred
liabilities................................. 141,000 132,000 268,000
Interest on taxes due......................... 12,500,000 27,578,000 23,500,000
Amortization of deferred debt expense......... 16,533,000 19,862,000 18,583,000
Other......................................... 232,000 362,000 726,000
------------- ------------- --------------
Total non-cash interest................... 29,406,000 21,722,000 41,339,000
------------- ------------- --------------
Total Interest Expense.......................... 201,698,000 239,802,000 354,910,000
------------- ------------- --------------
Less:
Interest income............................... 201,000 462,000 969,000
Interest expense capitalized during
construction................................ 2,897,000 2,964,000 9,718,000
------------- ------------- --------------
Interest Expense--Net........................... $ 198,600,000 $ 236,376,000 $ 344,223,000
------------- ------------- --------------
------------- ------------- --------------
</TABLE>
------------
* Interest accrued but not paid on pre-petition indebtedness is considered cash
interest expense.
** Includes reversal of prior years' expense of $26,212,000 and $52,884,000 in
1993 and 1992, respectively.
15. EARTHQUAKE LOSS
On January 17, 1994, a major earthquake struck the Los Angeles, California
area. Several of the Bullock's and I. Magnin stores that operate in this area
experienced property damage, merchandise loss, and business interruption. The
Bullock's Sherman Oaks and Northridge stores sustained extensive damage. The
Sherman Oaks store is expected to be in complete operation by October 1994 while
the Northridge store is expected to reopen in late 1995. The $15,000,000 loss
recorded reflects the estimated damage and costs related to the earthquake in
excess of insurance coverage. Insurance
26
<PAGE>
R.H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
15. EARTHQUAKE LOSS--(CONTINUED)
proceeds of $73,000,000 were applied against merchandise loss, property damage,
business interruption, and other related costs.
16. UNUSUAL ITEMS--NET
The unusual items--net in 1994 included (a) the costs incurred for
organizational realignments ($8,292,000) and (b) the costs incurred for business
restructuring ($11,208,000). The organizational realignment costs related to the
consolidation of various departments and the streamlining of operations. The
business restructuring costs related to the elimination of the sale of certain
types of merchandise as well as the closing of certain furniture stores.
The unusual items--net in 1993 included (a) the costs incurred for
organizational realignments ($19,768,000), (b) the costs incurred for business
restructuring ($9,597,000) offset by (c) a gain related to the sale of the
registrant's aircraft ($9,110,000). The organizational realignment costs related
to the consolidation of various departments and the streamlining of operations.
The business restructuring costs relate to the elimination of the sale of
certain types of merchandise in various geographic locations. These expenses
include severance and other incremental expenses net of disposition proceeds and
are part of the key business initiatives undertaken by Macy's beginning in
fiscal 1992.
The unusual items--net in 1992 included (a) the write-off of remaining
excess of cost over fair value of the net assets acquired during the 1986
acquisition of Former Macy's and the 1988 acquisition for the New Divisions of
Federated ($241,452,000), (b) costs incurred for Macy's East-West organizational
realignment ($40,000,000), and (c) costs incurred in the one-time liquidation of
certain aged inventory in temporary inventory liquidation facilities
($30,000,000). This one-time liquidation resulted from Macy's modification of
inventory management policy for the department stores which led to the
establishment of its inventory close-out operation, Macy's Close-Out.
As a result of Macy's operating performance, its overall decline in
financial condition, economic conditions, and an assessment of the prospects for
specific stores, it appeared in fiscal 1992 that future sales, earnings, and
cash flow amounts did not substantiate Macy's continuing to carry the remaining
excess of cost over fair value of the net assets acquired on its consolidated
statements of financial condition. Accordingly, Macy's wrote off the remaining
balance in fiscal 1992.
In February 1992, Macy's created two larger regional department store
groups, Macy's East and Macy's West, which are comprised of certain operating
subsidiaries. Macy's East consists of the Macy's Northeast, Inc. stores as well
as the stores of Macy's South Inc. located in Alabama, Florida, Georgia,
Louisiana, and South Carolina. Macy's West consists of the Macy's California,
Inc. and Bullock's, Inc. stores as well as the stores of Macy's South, Inc.
located in Texas. I. Magnin, Inc. was not affected by the realignment.
27
<PAGE>
R.H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
17. REORGANIZATION ITEMS--NET
The reorganization items--net occurring as a result of the Chapter 11
proceedings have been segregated from operations for the fiscal years ended July
30, 1994, July 31, 1993, and August 1, 1992. The major components of the
reorganization items--net are:
<TABLE>
<CAPTION>
FOR THE FISCAL FOR THE FISCAL FOR THE FISCAL
YEAR ENDED YEAR ENDED YEAR ENDED
JULY 30,1994 JULY 31,1993 AUGUST 1, 1992
-------------- -------------- --------------
<S> <C> <C> <C>
Reversal of post-petition interest expense
accruals on pre-petition secured debt (See Note
8)............................................. $ (57,460,000) -- --
Estimated expense/(reversal) of expense
associated with swap breakage claims on certain
asserted agreements (See Note 8)............... (33,695,000) 83,695,000 54,115,000
Professional fees and other expenses directly
related to the bankruptcy...................... 22,716,000 21,538,000 14,388,000
Retention costs.................................. 4,137,000 12,000,000 --
Estimated costs associated with the closing of
certain stores and support facilities and
estimated costs relating to additional vendor
claims (1992).................................. 29,475,000 76,100,000 168,494,000
Restructuring costs.............................. -- 21,500,000 --
Write-off of deferred debt expense related to
unsecured long-term debt....................... -- -- 16,307,000
Write-off of Preferred Stock issuance costs...... -- -- 8,280,000
Other............................................ -- 2,150,000 2,274,000
-------------- -------------- --------------
(34,827,000) 216,983,000 263,858,000
Less: Interest earned on accumulated cash
resulting from the Chapter 11 proceedings...... 3,855,000 2,324,000 2,736,000
-------------- -------------- --------------
$ (38,682,000) $ 214,659,000 $ 261,122,000
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
The estimated costs associated with the closing of certain stores includes
the write-off of remaining book value of assets, the related inventory
liquidation costs, severance costs, post-closing store expenses, and other
incremental expenses net of the estimated disposition proceeds.
18. INCOME TAXES
The provision for income taxes includes the following amounts:
<TABLE>
<CAPTION>
FISCAL 1994 FISCAL 1993 FISCAL 1992
------------ ----------- -----------
<S> <C> <C> <C>
Deferred federal income tax benefit.................. $ (1,628,000) $ -- $ --
State and local taxes................................ (1,997,000) 1,000,000 1,000,000
------------ ----------- -----------
Total provision for income taxes/(benefit)..... $ (3,625,000) $ 1,000,000 $ 1,000,000
------------ ----------- -----------
------------ ----------- -----------
</TABLE>
28
<PAGE>
R.H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
18. INCOME TAXES--(CONTINUED)
The reconciliation of taxes on income at the federal statutory rate to the
actual amounts provided is as follows:
<TABLE>
<CAPTION>
FISCAL 1994
------------
<S> <C> <C> <C>
Tax benefit computed at the Federal statutory
rates................................................ $(59,007,000)
Adjustment due to:
Limitation on the utilization of tax benefits...... 50,392,000
Professional fees and other expenses directly
related to the bankruptcy........................ 6,987,000
------------
Federal tax benefit.................................. $ (1,628,000)
------------
------------
</TABLE>
The Financial Accounting Standards Board Statement No. 109, "Accounting for
Income Taxes" ("FASB 109") was adopted as of August 1, 1993. FASB 109 requires,
in the year of adoption, an adjustment of certain assets and liabilities that
resulted from certain business combinations such as the 1986 Acquisition. The
adoption of FASB 109 resulted in a favorable cumulative effect income adjustment
of $185,340,000. This statement requires that a deferred tax liability be
recognized for the tax effects of taxable temporary differences and deferred tax
assets for the tax effects of deductible temporary differences, tax credit
carryforwards, and operating loss carryforwards. Tax expense in fiscal 1994 was
calculated in accordance with FASB 109.
Under prior accounting rules, an income tax benefit cannot be recognized for
the losses incurred in 1993 and 1992 because the benefit is not expected to be
recovered as an income tax refund or savings currently or in the near future.
At July 30, 1994, Macy's had an estimated net operating loss carryover of
$1,617,000,000 for Federal income tax purposes which includes approximately
$636,904,000 of post-petition interest expense not reflected in the accompanying
consolidated financial statements. The loss carryover will be available to
offset future taxable income through 2009. There is no expiration date on
approximately
29
<PAGE>
R.H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
18. INCOME TAXES--(CONTINUED)
$12,000,000 of the tax credit carryforwards. The tax effect of significant items
comprising Macy's net deferred tax liability as of July 30, 1994 are as follows:
<TABLE>
<S> <C>
Operating loss carryforwards........................................ $ 565,977,000
Accrued liabilities................................................. 117,601,000
Tax credit carryforwards............................................ 12,290,000
Capital leases...................................................... 24,974,000
Other............................................................... 43,481,000
-------------
Subtotal........................................................ 764,323,000
-------------
Property and equipment differences between book and tax............. (418,250,000)
Unrecorded post-petition interest................................... (222,916,000)
Inventory........................................................... (20,790,000)
Intangibles......................................................... (10,068,000)
Other............................................................... (32,086,000)
-------------
Subtotal........................................................ (704,110,000)
-------------
Deferred tax asset.................................................. 60,213,000
Valuation allowance................................................. (78,933,000)
-------------
Deferred tax liability.............................................. $ 18,720,000*
-------------
-------------
</TABLE>
------------
* Relates to state jurisdictions which have limitations on the utilization of
net operating loss carryforwards.
In 1993, Macy's announced that it reached an agreement with the Internal
Revenue Service ("IRS") regarding federal income taxes arising from its audit of
fiscal years 1984 through 1991; fiscal years 1992 and 1993 are currently being
examined by the IRS. The IRS will have a priority claim for federal income tax
of approximately $219 million inclusive of interest. Macy's estimates that its
actual liability will be approximately $151 million due to the availability and
carryback of certain net operating losses from fiscal year 1992. All appropriate
amounts for the agreed-upon settlement with the IRS, including interest, and the
related estimated state and local tax impact have been provided for and have
been included with Other Liabilities in the caption Obligations Subject to
Settlement Under Reorganization Proceedings.
On September 28, 1994, the California Franchise Tax Board approved a
settlement of approximately $17 million plus interest beginning on July 29, 1994
relating to the fiscal years 1976 through 1991. Such refund will be recorded as
income in the first quarter of fiscal year 1995, will be offset against other
amounts due to California, and will result in a net refund of approximately $4
million. The $17 million settlement has not been reflected in the consolidated
financial statements as of July 30, 1994.
19. EMPLOYEE BENEFIT PLANS
PENSION PLANS
Macy's has a noncontributory pension plan which covers substantially all
employees or employee groups meeting specified eligibility requirements. The
benefits are based on years of service and/or
30
<PAGE>
R.H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
19. EMPLOYEE BENEFIT PLANS--(CONTINUED)
compensation in the five highest of the participant's last ten full years of
employment. In general, with minor exceptions, Macy's funding policy has been to
contribute annually the maximum contribution permitted for the plan under the
full funding limitation of the Employee Retirement Income Security Act of 1974.
The following tables summarize the plan's funded status as of July 30, 1994
and July 31, 1993 and the components of pension expense for the fiscal years
1994, 1993, and 1992:
<TABLE>
<CAPTION>
JULY 30, JULY 31,
FUNDED STATUS 1994 1993
-------------------------------------- ------------ ------------
<S> <C> <C>
Actuarial present value of:
Vested benefit obligation........... $254,668,000 $239,619,000
------------ ------------
Accumulated benefit obligation...... 259,641,000 245,991,000
------------ ------------
Projected benefit obligation........ 340,522,000 322,551,000
------------ ------------
Plan assets at fair value*............ 367,690,000 363,645,000
------------ ------------
Plan assets in excess of projected
obligation.......................... 27,168,000 41,094,000
------------ ------------
Unrecognized asset.................... (67,707,000) (76,171,000)
------------ ------------
Unrecognized loss..................... 52,158,000 48,170,000
------------ ------------
Unrecognized prior service cost....... 1,162,000 1,306,000
------------ ------------
Prepaid pension costs................. $ 12,781,000 $ 14,399,000
------------ ------------
------------ ------------
</TABLE>
------------
* Plan assets consist primarily of fixed income securities and listed stocks.
<TABLE>
<CAPTION>
COMPONENTS OF PENSION EXPENSE 1994 1993 1992
------------------------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Service Cost..................................... $ 16,871,000 $ 16,358,000 $ 15,254,000
Interest......................................... 24,557,000 25,012,000 22,550,000
Actual return on assets.......................... (31,868,000) (17,853,000) (24,957,000)
Amortization of unrecognized net asset........... (8,463,000) (8,463,000) (8,463,000)
Amortization of unrecognized prior service
cost........................................... 141,000 145,000 153,000
Asset (loss) deferred............................ 379,000 (13,906,000) (6,119,000)
Amortization of overfunding in pension plan
recorded in connection with the Acquisition.... 5,000,000 5,000,000 5,000,000
------------ ------------ ------------
Pension expense.................................. $ 6,617,000 $ 6,293,000 $ 3,418,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
ACTUARIAL ASSUMPTION 1994 1993 1992
----------------------------------------------------------------- ---- ---- ----
<S> <C> <C> <C>
Rates of increase in compensation levels......................... 6% 6% 7%
Discount rate.................................................... 8% 8% 9%
Expected long-term rate of return on plan assets................. 9% 9% 9%
</TABLE>
During 1993 and 1992, Macy's incurred a pension curtailment due to a
reduction in the number of employees relating to the consolidation of certain
operations and the closing of certain stores. The result was a curtailment gain
of approximately $1,394,000 in 1993 and $3,500,000 in 1992.
Also see Note 9, Six-Year Term Loan, for additional information regarding
the plan's overfunded status.
31
<PAGE>
R.H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
19. EMPLOYEE BENEFIT PLANS--(CONTINUED)
SAVINGS AND PROFIT-SHARING PLANS
Macy's also has a savings plan and a terminated profit-sharing plan. The
savings plan fund consists of voluntary employee contributions, matching company
contributions, and all related earnings. The savings plan expense was
$4,827,000, $3,688,000, and $3,992,000 in 1994, 1993, and 1992. The balance in
the savings plan fund at July 30, 1994 was $207,407,000. The balance in the
profit-sharing fund at July 30, 1994 was $17,299,000. No contributions have been
made to the profit-sharing fund since 1976.
POSTRETIREMENT BENEFITS
The Financial Accounting Standards Board Statement No. 106 entitled
"Employers' Accounting for Postretirement Benefits Other Than Pensions" ("FASB
106") was adopted on August 1, 1993. This statement requires that employers
record the expected cost of postretirement benefits other than pensions during
the employees active years of service. Macy's provides medical and life
insurance benefits under various plans to certain retirees on a
contributory/non-contributory basis.
As of August 1, 1993, the accumulated postretirement obligation was
approximately $204,000,000. Macy's is recording this obligation through
amortization of the accumulated postretirement benefit obligation over a 20 year
period.
The following table sets forth the plans' status at July 30, 1994.
<TABLE>
<S> <C>
Accumulated Postretirement Benefit Obligations:
Active--Ineligible................................................. $ 88,950,000
Active--Eligible................................................... 8,920,000
Inactive........................................................... 124,727,000
------------
222,597,000
Plan assets at fair value............................................ --
------------
Accumulated postretirement benefit obligation in excess of plan
assets............................................................. 222,597,000
Less:
Unrecognized transition obligation................................. 193,705,000
Unrecognized loss.................................................. 8,211,000
------------
Accrued Postretirement Benefit Cost.................................. $ 20,681,000
------------
------------
</TABLE>
Net periodic postretirement benefit cost for fiscal 1994 included the
following components.
<TABLE>
<S> <C>
Service Cost.......................................................... $ 6,081,000
Interest Cost......................................................... 15,834,000
Amortizations of transition obligation over 20 years.................. 10,195,000
-----------
$32,110,000
-----------
-----------
</TABLE>
For measurement purposes, a range of 11.5%-19.0% annual rate of increase in
the per capita cost of covered health care benefits was assumed for 1994; the
rate was assumed to decrease gradually to 6.0% for 2005 and remain at that level
thereafter. The health care cost trend rate assumption has a significant effect
on the amounts reported. To illustrate, increasing the assumed health care cost
trend rates by one percentage point would increase the accumulated
postretirement benefit obligation as of July 30, 1994 by $19,252,000 and
increase the aggregate of the service and interest cost components of net
periodic postretirement benefit cost for the year then ended by $3,209,000.
32
<PAGE>
R.H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
19. EMPLOYEE BENEFIT PLANS--(CONTINUED)
The weighted average discount rate used in determining the accumulated
postretirement benefit obligations was 8.0% and the salary increase rate is age
weighted on starting at age 20 at 8.0% decreasing to 4.5% at age 64.
The amounts included as an expense for postretirement benefits under the
previous accounting method were approximately $20,000,000 lower in fiscal years
1993 and 1992.
In November 1992, the FASB issued Statement No. 112 entitled "Employers'
Accounting for Post Employment Benefits" ("FASB 112"). This statement requires
Macy's to recognize, during the employees active years of service, an obligation
for post employment benefits provided to former or inactive employees after
employment but before retirement. Macy's will adopt FASB 112 as of July 31, 1994
(fiscal year 1995) by recording a cumulative effect of a change in accounting.
The cumulative effect (non-cash) of this charge is estimated to be $11,000,000.
20. COMMITMENTS
a) Leases
Macy's and its subsidiaries lease land and/or buildings, warehouses, and
distribution facilities, and fixtures and store equipment for certain of their
retail stores. The leases generally provide for the payment of real estate taxes
and other related expenses and, in certain instances, increased rentals based on
percentages of sales. The leases provide for option renewal periods, and some
contain purchase options.
Capitalized leases included in property and equipment consist of:
<TABLE>
<CAPTION>
JULY 30, JULY 31,
1994 1993
------------ -----------
<S> <C> <C>
Property and equipment.......................................... $111,145,000 $82,515,000
Accumulated depreciation........................................ 42,394,000 29,397,000
------------ -----------
$ 68,751,000 $53,118,000
------------ -----------
------------ -----------
</TABLE>
Future minimum lease payments and sublease rental receipts due under
noncancelable leases as of July 30, 1994 are as follows:
<TABLE>
<CAPTION>
SUBLEASES RELATED
PRIMARILY TO
CAPITALIZED
FISCAL YEAR OPERATING LEASES CAPITALIZED LEASES LEASES
------------------------------------------ ---------------- ------------------ -----------------
<S> <C> <C> <C>
1995.................................... $ 53,346,000 $ 26,021,000 939,000
1996.................................... 52,655,000 19,085,000 939,000
1997.................................... 49,579,000 16,979,000 939,000
1998.................................... 48,588,000 7,403,000 939,000
1999.................................... 46,214,000 2,635,000 939,000
2000 and thereafter..................... 365,574,000 30,383,000 4,425,000
---------------- ------------------ -----------------
$615,956,000 102,506,000 $ 9,120,000
---------------- -----------------
---------------- -----------------
Less imputed interest................... 32,012,000
------------------
Obligations under capitalized leases.... $ 70,494,000*
------------------
------------------
</TABLE>
------------
* Includes $11,032,000 recorded in the caption Obligations Subject to Settlement
Under Reorganization Proceedings.
33
<PAGE>
R.H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
20. COMMITMENTS--(CONTINUED)
Rent expense consists of the following:
<TABLE>
<CAPTION>
FISCAL 1994 FISCAL 1993 FISCAL 1992
----------- ----------- ------------
<S> <C> <C> <C>
Minimum rentals:
Equipment leases................................. $ 7,943,000 $10,492,000 $ 18,839,000
Premise lease.................................... 47,524,000 43,208,000 47,492,000
Contingent rentals*................................ 43,498,000 39,852,000 34,292,000
----------- ----------- ------------
$98,965,000 $93,552,000 $100,623,000
----------- ----------- ------------
----------- ----------- ------------
</TABLE>
------------
* Including $3,858,000, $4,003,000, and $4,749,000 in fiscal years 1994, 1993,
and 1992, respectively, applicable to capitalized leases.
b) Data Processing and Information Services Arrangement
Macy's has entered an agreement with the Federated Systems Group ("FSG"),
formerly SABRE Group, a division of Federated, pursuant to which FSG will
provide certain data processing and information services to Macy's. The Base
Price (as defined) for the year that began September 1, 1992, was $59,600,000.
The agreement provides for additional Supplemental Fees (as defined) for
services in excess of the services included in the Base Price. The Base Price
and Supplemental Fees are calculated on the basis of FSG's costs plus a return
that covers profit and FSG's development investment. The agreement may be
terminated by Macy's, at Macy's election, at intervals from and after September
1, 1997. The amount billed to Macy's was $63,435,000, $61,693,000, and
$37,375,000 in fiscal years 1994, 1993, and 1992, respectively.
(c) Employment Arrangements
Macy's has individual employment arrangements with the Chief Executive
Officer, President, and the Chairman of Macy's West which contain terms of
employment for 3 years for one officer and 5 years for two officers.
Additionally, these arrangements provide salary, bonus, benefits, and provisions
for termination and severance under certain circumstances.
Macy's also has three-year employment arrangements with 116 executives in
order to assure the organization of the continued services of such executives.
Commitments for compensation under these agreements, exclusive of benefits
provided therein, over the periods that are covered by the agreements (generally
three years) totaled approximately $96,000,000. These arrangements provide for
the executives to receive a base salary, bonus, and other certain benefits as
well as provisions for severance in the event of termination as defined.
Macy's also entered into a revised arrangement in May 1993 with a former
officer, who is also a current director. This arrangement provides for services
to be rendered to Macy's through July 31, 1995 and contains applicable terms for
salary, current benefits, and post-employment and post-retirement benefits.
The commitment for future salaries and an estimate for bonuses under these
employment arrangements aggregated approximately $125,000,000 at July 30, 1994.
In August 1994, Macy's and Federated agreed that Macy's may enter into
severance, termination, or retention agreements or arrangements ("Program
Agreements") with any of Macy's "Corporate
34
<PAGE>
R.H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
20. COMMITMENTS--(CONTINUED)
Office" employees, including those with three-year employment arrangements (as
described above), provided that the cumulative amount of all payments and
healthcare benefit accruals under Program Agreements would not exceed
$32,000,000. The $32,000,000 maximum excludes any payments as may be due to the
Chief Executive Officer and the President.
On September 30, 1994, a $14,000,000 lump sum payment was made to the
President of Macy's upon the termination of his employment. However, if the
Merger is not effected, the lump sum payment will be returned to Macy's and the
President will return to full-time employment under the terms of his employment
arrangement. In addition, as of September 30, 1994, $7,000,000 has been paid
under the Program Agreements referred to above, reducing the commitment under
employment agreements by a total of $21,000,000.
21. RELATED PARTY TRANSACTIONS
Macy's has transactions with certain related parties. They are as follows:
a) GE Capital owns 19.2% of Macy's outstanding preferred stock.
Macy's and its subsidiaries purchased supplies and entered into transactions
relating to radio and television advertising in the net amount of
approximately $2,315,000, $3,306,000, and $6,457,000 from affiliates of GE
Capital in fiscal years 1994, 1993, and 1992, respectively.
Macy's has an arrangement with GE Capital (from May 1991) or an affiliate in
which GE Capital makes remittances to the Macy Operating Companies net of a
discount in respect of purchases effected by Macy's customers using credit
cards bearing tradenames used by Macy's. The net discount was $23,195,000,
$27,704,000, and $20,536,000 in fiscal years 1994, 1993, and 1992,
respectively.
The Macy Operating Companies have secured loans from GE Capital in the
aggregate amount of $53,200,000 at an annual interest rate of 10.44% (See
Note 9--Warehouse Financing).
b) Loews Corporation owns approximately 17.7% of Macy's outstanding
preferred stock.
Macy's and its subsidiaries purchased merchandise, entered into transactions
relating to radio and television and television advertising, obtained hotel
and related services, and purchased insurance from affiliates of Loews
Corporation. The approximate total amount expenses was $5,100,000,
$5,607,000, and $6,781,000 in fiscal years 1994, 1993, and 1992,
respectively.
35
<PAGE>
R.H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
22. QUARTERLY INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
AUGUST NOVEMBER FEBRUARY MAY FISCAL
TO OCTOBER TO JANUARY TO APRIL TO JULY YEAR
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE)
<S> <C> <C> <C> <C> <C>
52 weeks ended July 30,1994
Net retail sales............... $1,438,987 $1,997,244 $1,339,327 $1,387,788 $6,163,346
Cost of goods sold, including
occupancy and buying costs... 1,011,971 1,377,325 956,489 1,032,530 4,378,315
Unusual items--net............. -- -- -- 19,500 19,500
Earthquake loss................ -- -- 35,000 (20,000) 15,000
Reorganization items--net...... 8,068 11,585 6,049 (64,384) (38,682)
Cumulative effect of an
accounting change............ 185,340 -- -- -- 185,340
Net earnings/(loss)............ 67,418 60,453 (157,301) 49,803 20,373
Primary earnings/(loss) per
share*....................... 41.69 37.39 (97.28) 30.80 12.60
Fully diluted income per
share*....................... 4.61 4.13 -- 3.41 1.40
52 weeks ended July 31,1993
Net retail sales............... $1,482,637 $2,037,250 $1,336,672 $1,443,423 $6,299,982
Cost of goods sold, including
occupancy and buying costs... 1,037,988 1,426,338 950,894 1,046,725 4,461,945
Unusual items--net............. (9,110) -- -- 29,365 20,255
Reorganization items--net...... 8,422 13,407 109,692 83,138 214,659
Net earnings/(loss)............ (135,863) 8,909 (227,954) (188,993) (543,901)
Primary earnings/(loss) per
share*....................... (84.02) 5.51 (140.97) (116.88) (336.36)
Fully diluted income per
share*....................... -- 0.61 -- --
52 weeks ended August 1, 1992
Net retail sales............. $1,601,271 $2,055,875 $1,304,899 $1,486,840 $6,448,885
Cost of goods sold, including
occupancy and buying costs... 1,076,072 1,680,002 919,803 1,077,750 4,753,627
Unusual items.................. 30,000 284,926 -- -- 314,926
Reorganization items........... -- 102,861 90,720 67,541 261,122
Net loss....................... (155,356) (671,575) (225,866) (198,510) (1,251,307)
Net loss per share*............ (101.29) (417.57) (139.68) (122.79) (782.13)
</TABLE>
------------
* Each period is computed separately.
23. SUPPLEMENTARY DATA
The following disclosure of the estimated fair value of financial
instruments and related disclosure is made in accordance with the Financial
Accounting Standards Board Statement No. 107 entitled "Disclosure about Fair
Value of Financial Instruments." The statement requires all entities to disclose
the fair value of financial instruments, both assets and liabilities, recognized
and not recognized in the consolidated statements of financial condition, for
which it is practicable to estimate fair value.
36
<PAGE>
R.H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
23. SUPPLEMENTARY DATA--(CONTINUED)
The uncertainties related to the outcome of the Chapter 11 proceedings and
resulting effect upon the ultimate value of assets and liabilities add
significantly to the uncertain nature of any estimate of fair value.
The following methods and assumptions were used where it is practicable to
estimate fair value:
(i) Cash and cash equivalents, restricted cash, current receivables,
accounts payable, accrued liabilities, and short-term borrowings are
all short-term in nature and their carrying amounts approximate fair
value.
(ii) Notes 1 and 2 discuss the uncertainties of the Chapter 11 proceedings
and the Plan which significantly effect the estimated fair value of
financial instruments included in Obligations Subject to Settlement
Under Reorganization Proceedings. Settlement of these obligations and
any related interest is subject to various approvals (See Note 2) by
the Bankruptcy Court and other contingencies and other parties of
interest and was not fair valued at July 31, 1993. Distributions to
creditors of the Macy's Debtors under the Plan have an aggregate
estimated assumed value of approximately $4.1 billion. Therefore, the
amount utilized as fair value at July 30, 1994 for Obligations Subject
to Settlement Under Reorganization Proceedings is based on this assumed
value.
(iii) The estimated fair value of Macy's unsecured debt which includes the
14 1/2% Senior Subordinated Debentures, the 14 1/2% Subordinated
Debentures, and the 16 1/2% Junior Discount Debentures is based on
quoted market prices at July 31, 1993 for those issues that are traded
over the counter, and estimates provided by brokers for other issues.
However, quoted market prices and broker estimates inherently include
judgments concerning the outcome of the Chapter 11 proceedings, and do
not represent Macy's opinion as to the amounts that will be received
in respect thereof.
ESTIMATED FAIR VALUE
(IN 000'S)
<TABLE>
<CAPTION>
JULY 30, 1994 JULY 31, 1993
------------------------ ----------------------
CARRYING CARRYING FAIR
AMOUNT FAIR VALUE AMOUNT VALUE
---------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Cash and cash equivalents, restricted cash
and current receivables................... $ 279,711 $ 279,711 $ 196,118 $196,118
Accounts payable, accrued liabilities,
short-term borrowings, and income taxes
payable................................... 841,677 841,677 937,592 937,592
Obligations Subject to Settlement Under
Reorganization Proceedings................ 5,639,810 4,100,000 5,568,603 N/A
Unsecured Debt included in Obligations
Subject to Settlement Under Reorganization
Proceedings:
14 1/2% Senior Subordinated Debentures...... 379,000 284,400 379,000 135,019
14 1/2% Subordinated Debentures............. 383,434 131,000 383,434 59,432
14 1/2% Junior Subordinated Discount
Debentures................................ 634,428* 66,700 634,428* 45,996
</TABLE>
------------
* Face Amount ($503,177,000 accreted value at July 30, 1994 and July 31, 1993)
37
<PAGE>
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
SCHEDULE II--AMOUNTS RECEIVABLE FROM RELATED
PARTIES AND UNDERWRITERS, PROMOTERS, AND
EMPLOYEES OTHER THAN RELATED PARTIES
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G
---------------------------- -------- -------- -------- -------- ------------- --------
BALANCE
AT BALANCE
BEGINNING AT END
INTEREST OF DEDUCTIONS OF
NAME OF DEBTOR RATE DUE DATE PERIOD ADDITIONS (COLLECTIONS) PERIOD
---------------------------- -------- -------- -------- -------- ------------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
52 Weeks ended July 30, 1994
John Kent Anderson(A)...... -- 12/24/01 $265 $-- $-- $265
Sheila Arnold(A)........... -- 12/03/06 300 -- 33 267
Rudolph Borneo(A).......... -- 08/22/99 250 200 -- 450
Charles Chinni(A).......... -- 03/01/04 270 400 270(E) 400
David Coonfield(A)......... -- 08/03/02 150 -- 150(F) --
Emily Denning(A)........... -- 11/08/06 109 -- -- 109
Burnett Donoho(A).......... -- 04/15/08 600 -- -- 600
Donald Eugene(A)........... -- (H) 585 -- -- 585
Paul M. Fitzpatrick(A)..... -- 03/02/99 235 -- -- 235
Joy Frommer(A)............. -- 08/31/96 125 -- -- 125
John Gorham(A)............. -- 10/31/01 245 -- -- 245
Kent Keish(A).............. -- 12/11/01 250 -- -- 250
James Kenney(A)............ -- (G) -- 400 400(G) --
Richard Leto(A)............ -- 12/21/03 -- 100 -- 100
Tim Lupfer(A).............. -- 08/04/03 -- 150 -- 150
Michael Montanino(A)....... -- 10/31/98 200 -- -- 200
William Moll(A)............ -- 01/11/04 -- 150 -- 150
Max Roberts(A)............. -- 03/01/07 200 -- -- 200
Mary Lou Rogers(A)......... -- 12/01/03 -- 150 -- 150
Terry Schaefer(A).......... -- 05/24/04 -- 200 -- 200
Tom Shull(A)............... -- (G) 400 -- 400(G) --
Felix Smith(A)............. -- 07/31/97 275 -- -- 275
Michael Steinberg(A)....... -- 07/31/96 -- 400 -- 400
David Suliteanu(A)......... -- 09/09/01 250 -- -- 250
Myron E. Ullman,
III(A)(B)................... -- 12/18/95 600 -- 500(G) 100
Michael Wirkkala(A)........ -- 12/11/01 125 -- -- 125
52 weeks ended July 31, 1993
John Kent Anderson(A)...... -- 12/24/01 $265 $-- $-- $265
Sheila Arnold(A)........... -- 03/31/96 300 -- -- 300
Rudolph Borneo(A).......... -- 08/22/99 250 -- -- 250
Rose Marie Bravo(D)(A)..... -- 07/21/99 300 -- 300 --
Charles Chinni(A).......... -- 03/01/04 270 -- -- 270
David Coonfield(A)......... -- 08/03/02 -- 150 -- 150
Emily Denning(A)........... -- 11/08/06 109 -- -- 109
Burnett Donoho(A).......... -- 04/15/08 -- 600 -- 600
Donald Eugene(A)........... -- (H) 585 -- -- 585
Paul M. Fitzpatrick(A)..... -- 03/02/99 235 -- -- 235
Joy Frommer(A)............. -- 08/31/96 125 -- -- 125
John Gorham(A)............. -- 10/31/01 245 -- -- 245
Gary Guthrie(A)............ -- 10/24/01 189 -- 94 95
David Herman(A)............ -- 10/28/01 155 -- 73 82
Kent Keish(A).............. -- 12/11/01 250 -- -- 250
Michael Montanino(A)....... -- 10/31/98 200 -- -- 200
Max Roberts(A)............. -- 03/01/07 200 -- -- 200
Tom Shull(A)............... -- (G) -- 400 -- 400
Felix Smith(A)............. -- 07/31/97 350 -- 75 275
David Suliteanu(A)......... -- 09/09/01 250 -- -- 250
Myron E. Ullman,
III(A)(B)................... -- 11/01/18 600 -- -- 600
Michael Wirkkala(A)........ -- 12/11/01 125 -- -- 125
</TABLE>
38
<PAGE>
R.H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
SCHEDULE II--AMOUNTS RECEIVABLE FROM RELATED
PARTIES AND UNDERWRITERS, PROMOTERS, AND
EMPLOYEES OTHER THAN RELATED PARTIES--(CONTINUED)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G
---------------------------- -------- -------- -------- -------- ------------- --------
BALANCE
AT BALANCE
BEGINNING AT END
INTEREST OF DEDUCTIONS OF
NAME OF DEBTOR RATE DUE DATE PERIOD ADDITIONS (COLLECTIONS) PERIOD
---------------------------- -------- -------- -------- -------- ------------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
52 Weeks ended August 1,
1992
John Kent Anderson(A)...... -- 12/24/01 $-- $265 $-- $265
Sheila Arnold(A)........... -- 03/31/96 -- 300 -- 300
Rudolph Boreno(A).......... -- 08/22/99 250 -- -- 250
Rose Marie Bravo(A)........ -- 07/21/99 300 -- -- 300
Charles Chinni(A).......... -- 03/01/04 270 -- -- 270
Emily Denning(A)........... -- 11/08/06 -- 109 -- 109
Donald Eugene(A)........... -- (H) -- 585 -- 585
Paul M. Fitzpatrick(A)..... -- 03/02/99 235 -- -- 235
Joy Frommer(A)............. -- 08/31/96 -- 125 -- 125
John Gorham(A)............. -- 10/31/01 -- 245 -- 245
Gary Guthrie(A)............ -- 10/24/01 -- 189 -- 189
David Herman(A)............ -- 10/28/01 -- 155 -- 155
Kent Keish(A).............. -- 12/11/01 -- 250 -- 250
Michael Montanino(A)....... -- 10/31/98 200 -- -- 200
Max Roberts(A)............. -- 03/01/07 -- 200 -- 200
Jeffery Rusinow(C)(A)...... -- 06/15/98 200 -- 200(C) 0
Felix Smith(A)............. -- 07/31/97 -- 350 -- 350
David Suliteanu(A)......... -- 09/09/01 -- 250 -- 250
Myron E. Ullman,
III(A)(B)................... -- 11/01/18 600 -- -- 600
Michael Wirkkala(A)........ -- 12/11/01 -- 125 -- 125
</TABLE>
------------
NOTES:
(A) The listed loans were made in connection with certain housing and/or
relocation activities.
(B) Mr. Ullman's additional loan relates to his designation as purchaser of
certain shares of Macy Common Stock and bears interest at a rate of 8.25%
per annum. This loan is due on the earlier of December 18, 1995 or the date
on which employment shall cease or terminate for any reason.
(C) Loan was fully paid on August 27, 1991.
(D) Loan was fully paid on January 4, 1993.
(E) Mr. Chinni's loan for $270,000 was fully satisfied in fiscal 1994. The
$400,000 additional loan is due by March 1, 2004.
(F) Loan was fully paid on September 14, 1993.
(G) Loan was forgiven in July 1994.
(H) Mr. Eugene's loan will be repaid from the proceeds of the sale of his
residence, which is currently being marketed.
39
<PAGE>
SCHEDULE V
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
SCHEDULE V--PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
------------------------------------------- ---------- --------- ----------- ------------- ----------
BALANCE AT OTHER CHANGES BALANCE AT
BEGINNING ADDITIONS ADD (DEDUCT) END
CLASSIFICATION OF PERIOD AT COST RETIREMENTS DESCRIBE OF PERIOD
------------------------------------------- ---------- --------- ----------- ------------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
52 weeks ended July 30, 1994:
Land...................................... $ 417,072 $ -- $ (12,761)(3) $ -- $ 404,311
Buildings and improvements on owned
properties.............................. 1,521,521 6,806(1) (5,909)(2) 18(4) 1,465,212
(57,224)(3)
Buildings and improvements on leased
properties.............................. 463,602 9,564(1) (837)(2) 17(4) 633,022
(11,491)(3) 172,167(5)
Fixtures and equipment.................... 922,579 92,569(1) (140,755)(2) 9,389(4) 866,154
(34,864)(3) 17,236(5)
Construction in progress.................. 99,267 143,070)(1) (216)(3) (9,424)(4) 123,758
(108,939
Capitalized leases........................ 82,515 32,793 (3,559)(2) -- 111,145
(604)(3)
Leasehold values.......................... 19,210 -- -- 1,729(5) 20,939
---------- --------- ----------- ------------- ----------
$3,525,766 $ 175,863 $(268,220) $ 191,132 $3,624,541
---------- --------- ----------- ------------- ----------
---------- --------- ----------- ------------- ----------
52 weeks ended July 31, 1993:
Land...................................... $ 419,399 $ 346(1) $ (2,673)(3) $ -- $ 417,072
Buildings and improvements on owned
properties.............................. 1,519,722 11,107(1) (6,601)(2) (1,210)(4) 1,521,521
(1,497)(3)
Buildings and improvements on leased
properties.............................. 449,656 76,151(1) (6,859)(2) 2,780(4) 463,602
(58,126)(3)
Fixtures and equipment.................... 916,249 109,318(1) (93,629)(2) 8,995(4) 922,579
(18,354)(3)
Construction in progress.................. 195,257 113,913)(1) (2,416)(3) (10,565)(4) 99,267
(196,922
Capitalized leases........................ 63,704 21,850 (171)(2) -- 82,515
(2,868)(3)
Leasehold values.......................... 22,067 -- (2,857) -- 19,210
---------- --------- ----------- ------------- ----------
$3,586,054 $ 135,763 $(196,051) $ 0 $3,525,766
---------- --------- ----------- ------------- ----------
---------- --------- ----------- ------------- ----------
53 weeks ended August 1, 1992:
Land...................................... $ 428,937 $ 164(1) $ (9,685)(3) $ (17)(4) $ 419,399
Buildings and improvements on owned
properties.............................. 1,572,326 14,191(1) (4,711)(2) (4,667)(4) 1,519,722
(57,417)(3)
Buildings and improvements on leased
properties.............................. 421,979 25,519(1) (2,327)(2) 42,937(4) 449,656
(38,452)(3)
Fixtures and equipment.................... 886,029 162,346(1) (62,416)(2) (42,759)(4) 916,249
(26,951)(3)
Construction in progress.................. 146,752 246,219 -- 4,506(4) 195,257
(202,220)(1)
Capitalized leases........................ 34,903 29,993 (1,192)(3) -- 63,704
Leasehold values.......................... 24,083 -- (2,016)(3) -- 22,067
---------- --------- ----------- ------------- ----------
$3,515,009 $ 276,212 $(205,167) $ 0 $3,586,054
---------- --------- ----------- ------------- ----------
---------- --------- ----------- ------------- ----------
</TABLE>
See notes to Schedule V--Property and Equipment
40
<PAGE>
R.H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO SCHEDULE V--PROPERTY AND EQUIPMENT
NOTES:
(1) Completed projects transferred to appropriate property and equipment
captions.
(2) Fully depreciated assets.
(3) Assets sold or scrapped, including assets in stores closed in the three
fiscal years and write-offs due to earthquake damage and lease cancellations
in 1994.
(4) Transfers between fixed asset captions.
(5) Property and equipment was increased due to the remeasurement of assets
required upon adoption of FASB 109, "Accounting for Income Taxes." (See Note
18 of Notes to Consolidated Financial Statements.)
(6) Depreciation is computed on a straight-line method using the following rates
on an annual basis:
(a) Buildings on owned properties:
<TABLE>
<S> <C>
Main store buildings............................................... 2% to 2.5%
Main warehouses.................................................... 2% to 5%
Building equipment................................................. 5%
Site improvements.................................................. 10%
</TABLE>
(b) Buildings, building improvements, and equipment on leased properties and
leasehold values:
Amortized over terms of lease, or at the rates stated in (a) above if those
rates result in amortization over a shorter period.
(c) Capitalized leases, recorded in accordance with the provisions of
Statement of Financial Accounting Standards No. 13, are amortized over
the respective lease terms.
(d) Store fixtures and equipment--primarily 10% to 33-1/3%.
41
<PAGE>
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
SCHEDULE VI--ACCUMULATED DEPRECIATION OF PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
-------------------------------- ---------- ---------- ----------- ------------- ----------
ADDITIONS
BALANCE AT CHARGED TO OTHER CHANGES BALANCE AT
BEGINNING COSTS AND ADD (DEDUCT) END OF
CLASSIFICATION OF PERIOD EXPENSES RETIREMENTS DESCRIBE PERIOD
-------------------------------- ---------- ---------- ----------- ------------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
52 weeks ended July 30, 1994:
Buildings and improvements on
owned properties............ $ 455,626 $ 69,279 $ (21,755)(1) $ 497,241
(5,909)(2)
Buildings and improvements on
leased properties........... 108,826 38,432 (341)(1) $ 10(3) 146,090
(837)(2)
Fixtures and equipment........ 489,224 146,410 (18,236)(1) (3,921)(3) 472,722
(140,755)(2)
Capitalized leases............ 29,397 13,001 (356)(1) 3,911(3) 42,394
(3,559)(2)
Leasehold values.............. 6,866 1,126 (132)(1) 7,860
---------- ---------- ----------- ------------- ----------
$1,089,939 $268,248 $ (191,880) $ 0 $1,166,307
---------- ---------- ----------- ------------- ----------
---------- ---------- ----------- ------------- ----------
52 weeks ended July 31, 1993:
Buildings and improvements on
owned properties............ $ 393,769 $ 70,181 $ (389)(1) $ (1,334)(3) $455,626
(6,601)(2)
Buildings and improvements on
leased properties........... 106,825 25,827 (16,559)(1) (408)(3) 108,826
(6,859)(2)
Fixtures and equipment........ 446,345 141,917 (7,151)(1) 1,742(3) 489,224
(93,629)(2)
Capitalized leases............ 18,835 11,482 (749)(1) 29,397
(171)
Leasehold values.............. $ 6,620 1,103 (857)(1) -- 6,866
---------- ---------- ----------- ------------- ----------
972,394 $250,510 $ (132,965) $ 0 $1,089,939
---------- ---------- ----------- ------------- ----------
---------- ---------- ----------- ------------- ----------
53 weeks ended August 1, 1992:
Buildings and improvements on
owned properties............ $ 342,255 $ 71,859 $ (16,424)(1) $ 790(3) $ 393,769
(4,711)(2)
Buildings and improvements on
leased properties........... 80,173 25,143 (6,049)(1) 9,885(3) 106,825
(2,327)(2)
Fixtures and equipment........ 395,788 139,383 (15,735)(1) (10,675)(3) 446,345
(62,416)(2)
Capitalized leases............ 11,490 7,924 (579)(1) -- 18,835
Leasehold values.............. 6,020 1,154 (554)(1) -- 6,620
---------- ---------- ----------- ------------- ----------
$ 835,726 $245,463 $ (108,795) $ 0 $ 972,394
---------- ---------- ----------- ------------- ----------
---------- ---------- ----------- ------------- ----------
</TABLE>
------------
NOTES:
(1) Assets sold or scrapped including assets in stores closed in the three
fiscal years and write-offs due to earthquake damage and lease cancellations
in 1994.
(2) Fully depreciated assets.
(3) Transfer between reserve captions.
42
<PAGE>
SCHEDULE IX
R.H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
SCHEDULE IX--SHORT-TERM BORROWINGS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
-------------------------------------- ---------- -------- ----------- ----------- -----------
MAXIMUM AVERAGE WEIGHTED
WEIGHTED AMOUNT AMOUNT AVERAGE
BALANCE AT AVERAGE OUTSTANDING OUTSTANDING INTEREST
CATEGORY OF AGGREGATE SHORT-TERM END OF INTEREST DURING THE DURING THE RATE DURING
BORROWINGS PERIOD RATE PERIOD PERIOD THE PERIOD
-------------------------------------- ---------- -------- ----------- ----------- -----------
(1) (2)
<S> <C> <C> <C> <C> <C>
52 weeks ended July 30, 1994:
Debtor-in-Possession Facility(3).... $ -- -- $ 306,300 $62,654 6.00%
Macy Revolving Credit Facility(4)... $ -- -- $ -- $-- --
52 weeks ended July 31, 1993:
Debtor-in-Possession Facility(3).... $ 65,900 6.67% $ 290,000 $58,563 6.57%
Macy Revolving Credit Facility(4)... $ -- -- $ -- $-- --
52 weeks ended August 1, 1992:
Debtor-in-Possession Facility(3).... $ -- -- $ -- $-- --
Macy Revolving Credit Facility(4)... $ -- -- $ -- $-- --
</TABLE>
------------
NOTES:
(1) Average amount outstanding during the period is computed by dividing the
total of weekly outstanding principal balances by the weeks during the
period.
(2) Weighted average interest rate during the period is computed by dividing the
actual short-term interest expense by the average short-term debt
outstanding during the period.
(3) The Post-Petition Credit Agreement dated as of January 27, 1992 was amended
and restated on August 12, 1993. The agreement provides a working capital
facility, subject to certain sublimits, not to exceed $550,000,000 (amended
from $600,000,000). On August 26, 1994, the maximum working capital facility
was reduced at Macy's option by $100,000,000 to $450,000,000. The Amended
and Restated Post-Petition Credit Agreement terminates upon the earlier of
(1) August 1, 1995 or (2) the substantial consummation of a plan of
reorganization of Macy's or certain of its subsidiaries. Macy's pays
interest at a rate per annum equal to 1.5% plus the alternative Base Rate or
at Macy's option, at a rate of 2.5% per annum in excess of the reserve
adjusted London Interbank Offered Rate.
(4) The original Macy Bank Agreement dated as of July 10, 1986 was amended and
restated as of April 27, 1988. The Macy Revolving Credit Facility reflects
the terms of the amended and restated Macy Bank Agreement which provided for
a six-year revolving working capital line of credit, subject to certain
sublimits, not to exceed $587,700,000. Macy's paid the banks interest on the
average daily principal amount outstanding under the revolving credit
agreement at a rate per annum equal to 1.25% plus the Base Rate or, at
Macy's option, 2.25% plus the Eurodollar Rate. Macy's is in default of the
Macy Bank Agreement as a result of its Chapter 11 cases. Therefore the
amount outstanding under the revolving credit agreement is included in
Obligations Subject to Settlement Under Reorganization Proceedings.
43
<PAGE>
R.H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
SCHEDULE X--SUPPLEMENTARY INCOME STATEMENT INFORMATION
<TABLE>
<CAPTION>
COLUMN B
--------------------------------
CHARGED TO COSTS AND EXPENSES
--------------------------------
YEAR ENDED
--------------------------------
COLUMN A AUGUST
------------------------------------------------------------ JULY 30, JULY 31, 1,
ITEM 1994 1993 1992
------------------------------------------------------------ -------- -------- --------
(52 (52 (52
WEEKS) WEEKS) WEEKS)
<S> <C> <C> <C>
Depreciation of property and equipment...................... $268,248 $250,510 $245,463
-------- -------- --------
-------- -------- --------
Taxes, other than payroll and income taxes(1)............... $ 60,429 $ 61,556 $ 63,744
-------- -------- --------
-------- -------- --------
Rents....................................................... $ 98,965 $ 93,552 $100,623
-------- -------- --------
-------- -------- --------
Advertising costs........................................... $385,155 $417,029 $455,725
-------- -------- --------
-------- -------- --------
</TABLE>
------------
NOTES:
(1) Processing taxes, liquor taxes, and import duties have all been charged to
cost of sales. They are not included herein because they are considered to
be part of the initial purchase cost of merchandise; a segregation of such
taxes is not practicable.
(2) No other required information has been presented since the amounts do not
exceed 1% of total sales as reported in the related consolidated statement
of operations.
44
<PAGE>
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
------------------------------------
OCTOBER 29, 1994 OCTOBER 30, 1993
---------------- ----------------
(13 WEEKS)
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE)
<S> <C> <C>
Net retail sales (including licensed departments)
(Note 9)......................................... $1,480,007 $1,438,987
Less:
Cost of goods sold, including occupancy and buying
costs............................................ 1,045,834 1,011,971
Selling, general, and administrative expenses...... 445,251 472,115
Unusual item (Note 4).............................. 80,000 --
---------------- ----------------
Loss from operations before interest expense and
reorganization items............................. (91,078) (45,099)
Interest expense--net (contractual interest of
$123,627 in fiscal 1995 and $121,762 in fiscal
1994) (Note 3)................................... 52,064 67,953
---------------- ----------------
Loss before reorganization items................... (143,142) (113,052)
Reorganization items--net (Note 5)................. 6,740 8,068
---------------- ----------------
Loss before income tax benefit and cumulative
effect of accounting changes..................... (149,882) (121,120)
Income tax benefit (Note 7)........................ (30,449) (3,198)
Loss before cumulative effect of accounting
changes.......................................... (119,433) (117,922)
---------------- ----------------
Cumulative effect of accounting changes--net (Notes
7 and 8)......................................... (10,657) 185,340
Net earnings/(loss)................................ $ (130,090) $ 67,418
---------------- ----------------
---------------- ----------------
Primary earnings/(loss) per share of common stock
(Note 10):
Loss before cumulative effect of accounting
changes.......................................... $ (73.86) $ (72.93)
Cumulative effect of accounting chances--net....... (6.59) 114.62
---------------- ----------------
Net earnings/(loss)................................ $ (80.45) $ 41.69
---------------- ----------------
---------------- ----------------
Fully diluted earnings per share (Note 10):
Loss before cumulative effect of accounting
changes.......................................... $ (8.07)
Cumulative effect of accounting changes--net....... 12.68
----------------
Net earnings/(loss)................................ $ 4.61
----------------
----------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
45
<PAGE>
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF
FINANCIAL CONDITION
<TABLE>
<CAPTION>
OCTOBER 29, OCTOBER 30, JULY 30,
1994 1993 1994
------------ ------------ ------------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents..................... $ 34,529 $ 43,240 $ 112,677
Restricted cash............................... 54,870 38,868 44,393
Merchandise inventories (Note 6).............. 1,524,576 1,574,601 1,244,253
Other current assets.......................... 192,083 201,686 184,911
------------ ------------ ------------
Total Current Assets........................ 1,806,058 1,858,395 1,586,234
Other Assets.................................... 85,908 125,905 99,318
Property and Equipment (including capitalized
leases), at cost, less accumulated
depreciation of $1,214,096, $1,119,371 and
$1,166,307.................................... 2,419,036 2,583,200 2,458,234
------------ ------------ ------------
$ 4,311,002 $ 4,567,500 $ 4,143,786
------------ ------------ ------------
------------ ------------ ------------
LIABILITIES AND DEFICIENCY IN NET ASSETS
Current Liabilities:
Short-term borrowings--net (Note 3)........... $ 133,072 $ 244,362 $ --
Accounts payable and accrued liabilities (Note
3).......................................... 969,668 1,001,458 841,167
Current income taxes (Note 7)................. 589 179 510
Current portion of obligations under
capitalized leases (Note 2)................. 14,529 13,274 15,222
------------ ------------ ------------
Total Current Liabilities................... 1,117,858 1,259,273 856,899
Deferred Taxes (Note 7)......................... 2,484 20,520 18,720
Other Long-Term Liabilities (Note 3)............ 145,214 125,048 128,435
Obligations Under Capitalized Leases (Note 3)... 40,884 25,042 44,240
Obligations Subject to Settlement Under
Reorganization Proceedings (Note 3)........... 5,678,970 5,634,890 5,639,810
Deficiency in Net Assets:
Common stock.................................. 1,750 1,750 1,750
Deficit....................................... (2,674,825) (2,497,690) (2,544,735)
Less:
Treasury shares, at cost.................... (1,333) (1,333) (1,333)
------------ ------------ ------------
Deficiency in Net Assets.................. (2,674,408) (2,497,273) (2,544,318)
------------ ------------ ------------
$ 4,311,002 $ 4,567,500 $ 4,143,786
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
46
<PAGE>
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
--------------------------
OCTOBER 29, OCTOBER 30,
1994 1993
----------- -----------
(13 WEEKS)
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Operating Activities:
Net earnings/(loss)........................................ $(130,090) $ 67,418
Adjustments to reconcile net earnings/(loss) to net cash
used for operating activities:
Items not requiring the outlay of cash:
Depreciation and amortization........................ 71,962 75,491
Interest accrued on pre-petition secured debt........ 41,175 53,191
Non-cash interest.................................... 7,417 10,337
Accrued postretirement benefits...................... 6,507 6,500
Cumulative effect of accounting changes--net......... 10,657 (185,340)
Deferred taxes....................................... (15,893) --
Increase in working capital (excluding cash and cash
equivalents and current portion of debt instruments) (169,392) (185,571)
Decrease/(increase) in working capital due to
reorganization proceedings......................... (7,701) 6,186
Other................................................ 7,473 556
----------- -----------
Net cash used for operating activities............... (177,885) (151,232)
----------- -----------
Investing Activities:
Additions to property and equipment.................. (30,099) (22,039)
----------- -----------
Net cash used for investing activities............... (30,099) (22,039)
----------- -----------
Financing Activities:
Reduction in obligations under capitalized leases.... (5,064) (4,486)
Increase in short-term borrowings.................... 134,900 184,300
Cost of short-term borrowings........................ -- (4,836)
----------- -----------
Net cash provided by financing activities............ 129,836 174,978
----------- -----------
Increase/(Decrease) In Cash and Cash Equivalents....... (78,148) 1,707
Cash and Cash Equivalents, Beginning of Period......... 112,677 41,533
----------- -----------
Cash and Cash Equivalents, End of Period............... $ 34,529 $ 43,240
----------- -----------
----------- -----------
</TABLE>
SUPPLEMENTAL INFORMATION
Amounts in this statement of cash flows are presented on a cash basis and
may differ from those in other sections of this report.
Interest amounts paid (excluding interest expense capitalized during
construction) for the quarters ended October 29, 1994 and October 30, 1993 were
$2,818,000 and $4,549,000, respectively.
Income taxes paid net of tax refunds received for the quarters ended October
29, 1994 and October 30, 1993 were $170,000 and $450,000, respectively.
See Notes to Condensed Consolidated Financial Statements.
47
<PAGE>
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED OCTOBER 29, 1994 (13 WEEKS) AND
OCTOBER 30, 1993 (13 WEEKS)
(UNAUDITED)
1. The accompanying Notes to Condensed Consolidated Financial Statements
should be read in conjunction with the Notes to Consolidated Financial
Statements included in the annual report on Form 10-K for the fiscal year ended
July 30, 1994 for R.H. Macy & Co., Inc. ("Macy's") and its consolidated
subsidiaries filed with the Commission. In the opinion of management, all
adjustments necessary for a fair presentation of the results of operations for
the interim period have been included. Because of the seasonal nature of the
business, results for the interim period are not necessarily indicative of a
full year's operations.
2. On July 14, 1994, the respective Boards of Directors of Macy's and
Federated Department Stores, Inc. ("Federated") announced that they had reached
an agreement in principle on a merger which would be effected as part of a joint
plan of reorganization of Macy's and all subsidiaries that filed a Chapter 11
case ("Macy Debtors") in the United States Bankruptcy Court for the Southern
District of New York ("Bankruptcy Court"). (Federated's wholly-owned subsidiary,
Federated Noteholding Corporation ("FNC"), is one of the largest secured
creditors of the Macy Debtors.) On October 21, 1994, the Macy Debtors and
Federated (collectively, the "Plan Proponents") filed a Second Amended Joint
Plan of Reorganization of R.H. Macy & Co., Inc. and Certain of its Subsidiaries
in the Bankruptcy Court, having previously filed versions thereof with the
Bankruptcy Court on July 29, 1994 and August 31, 1994, respectively. The Second
Amended Joint Plan was further modified on December 7, 1994 (as modified, the
"Plan") and confirmed by order of the Bankruptcy Court entered on December 8,
1994. In addition, Macy's and Federated executed and delivered an Agreement and
Plan of Merger, dated as of August 16, 1994 (the "Merger Agreement"), providing
for the merger of Federated with and into Macy's (the "Merger"), with Macy's
being the surviving corporation (the "Combined Company") and being renamed
"Federated Department Stores, Inc." upon the consummation of the Merger. The
execution and delivery of the Merger Agreement and certain provisions thereof
were approved by the Bankruptcy Court on September 8, 1994.
A principal element of the Plan is the Merger. Macy's and Federated
presently intend to seek to cause the effective time of the Merger (the
"Effective Time of the Merger"), the date on which the Plan becomes effective
(the "Effective Date of the Plan") and substantial consummation of the Plan to
occur in December 1994. The Effective Time of the Merger and the Effective Date
of the Plan will occur simultaneously. After consummation of the Merger, the
Combined Company will operate the existing businesses of Macy's and Federated.
Consistent with the structure of the Merger Agreement, the transaction is to be
accounted for as a reverse acquisition in which Federated is the acquirer for
accounting purposes.
In addition to the Merger, the Plan provides for, among other things: (i)
the cancellation of all existing capital stock and other equity interests of
Macy's without payment of any consideration thereof; (ii) the cancellation of
certain indebtedness (including Macy's three issues of subordinated debentures
and other unsecured indebtedness) and the discharge of related claims against
the Macy Debtors in exchange for cash, new indebtedness of the Combined Company
and certain of its subsidiaries, or new equity interests of the Combined
Company; (iii) the discharge of other prepetition claims against the Macy
Debtors; (iv) the settlement of certain contingent claims and releases of
certain claims of the Macy Debtors and other persons or entities; and (v) the
48
<PAGE>
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
QUARTERS ENDED OCTOBER 29, 1994 (13 WEEKS) AND
OCTOBER 30, 1993 (13 WEEKS)
(UNAUDITED)
assumption, assumption and assignment, or rejection of each executory contract
and unexpired lease to which any Macy Debtor is a party. The Plan provides for
(a) the distribution of cash to unaffiliated third parties in an estimated
aggregate amount of approximately $0.4 billion, (b) the issuance, reinstatement,
or assumption of indebtedness to unaffiliated third parties in an estimated
aggregate amount of approximately $1.9 billion, and (c) the issuance to
unaffiliated third parties of common stock, par value $0.01 per share, of the
Combined Company ("New Combined Company Common Stock") and warrants to purchase
shares of New Combined Company Common Stock ("New Warrants") with an assumed
aggregate value, solely for purposes of developing the Plan, of approximately
$1.2 billion. There can be no assurance, however, that the New Combined Company
Common Stock will have the value assumed for purposes of developing the Plan.
The assumed value of the New Combined Company Common Stock and the New Warrants
is the value assumed and contained in the Plan and does not purport to represent
an estimate of the actual market value of the New Combined Company Common Stock
or the value of the New Warrants.
There are a number of procedural and substantive requirements to the Plan
becoming effective under the Bankruptcy Code and certain conditions to such
effectiveness set forth in the Plan. Among others, the Plan becoming effective
is conditioned upon the satisfaction or waiver of the following conditions: (i)
the aggregate amounts of specified categories of claims against the Macy
Debtors, including certain cash payment claims, having been estimated or
determined by Bankruptcy Court orders (to the extent the Bankruptcy Court has
jurisdiction) that are not subject to any stay in amounts that do not exceed the
Macy Debtors' estimated aggregate amounts for each such category of claims used
in connection with the development of the Plan (which condition has been waived
by Federated); (ii) the order of the Bankruptcy Court confirming the Plan (the
"Confirmation Order") being reasonably acceptable in form and substance to each
of Federated and Macy's, which order was signed and entered by the Bankruptcy
Court on December 8, 1994; and (iii) the New Combined Company Common Stock being
authorized for listing on the New York Stock Exchange, Inc. (the "NYSE") upon
official notice of issuance. Additionally, there are certain conditions that
must be satisfied for the Plan to become effective. There can be no assurance
that these conditions will be satisfied.
The obligations of Federated and Macy's to consummate the Merger are
conditioned upon, among other things: (i) the absence of any pending injunction,
order, or decree of any governmental authority restraining the Merger or the
consummation of the transactions contemplated by the Plan; (ii) the absence of
any law promulgated or enacted restraining the Merger or the transactions
contemplated by the Plan; (iii) all consents and approvals of any governmental
authority to the Merger having been obtained and remaining in effect at the
Effective Time of the Merger, other than any that, if not obtained, would not
have a material adverse effect on the business, financial condition, or results
of operations of the Combined Company and its subsidiaries, taken as a whole, or
any antitrust authorizations not obtained as a result of Federated's failure to
divest, hold, separate, or take other action (or its failure to agree to do any
thereof) with respect to its or the Combined Company's assets to the extent
required by the Merger Agreement; (iv) all other consents, approvals, and
authorizations required to be obtained by either party having been obtained and
remaining in effect at the Effective Time of the Merger, other than any that, if
not obtained, would not have a material adverse effect on the business,
financial condition, or results of
49
<PAGE>
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
QUARTERS ENDED OCTOBER 29, 1994 (13 WEEKS) AND
OCTOBER 30, 1993 (13 WEEKS)
(UNAUDITED)
operations of the Combined Company and its subsidiaries, taken as a whole, or
any consents and approvals of Federated's institutional lenders; (v) the
adoption by Federated's stockholders of the Merger Agreement (which occurred on
November 29, 1994); (vi) a registration statement under the Securities Act of
1933, as amended (the "Securities Act"), for the shares of New Combined Company
Stock to be issuable in connection with the Merger having been declared
effective by the Securities and Exchange Commission (which occurred on October
21, 1994) and not subject to any stop order or proceedings seeking the same;
(vii) the shares of the New Combined Company Common Stock having been authorized
for listing on the NYSE upon official notice; and (viii) the Bankruptcy Court
having entered the Confirmation Order (which occurred on December 8, 1994), at
least 10 days having passed since entry of such order and it not having been
subject to any stay, and all conditions to the Effective Date of the Plan having
been satisfied or duly waived.
Accordingly, notwithstanding confirmation of the Plan by the Bankruptcy
Court, the Plan and Merger remain subject to certain other conditions, some of
which are beyond Macy's's control.
3. On January 27, 1992, Macy's, together with nine of its subsidiaries,
filed voluntary petitions for reorganization under chapter 11 ("Chapter 11"),
title II of the United States Code, as amended (the "Bankruptcy Code") in the
Bankruptcy Court. On January 31, 1992, seventy-eight additional subsidiaries
each commenced a Chapter 11 case in the Bankruptcy Court. The Macy Debtors are
currently operating their respective businesses as debtors-in-possession. Two
statutory creditor committees have been appointed. The cases of Macy's's
subsidiaries that filed such petitions are being jointly administered with the
case of Macy's for procedural purposes only.
The Condensed Consolidated Financial Statements of Macy's have been prepared
in accordance with generally accepted accounting principles applicable to a
going concern, which assumes continuity of operations in the ordinary course of
business. Additionally, the amounts reported on the Condensed Consolidated
Statement of Financial Condition could materially change in the future because
of the Plan, since such reported amounts do not give effect to adjustments to
the carrying value of the underlying assets or amounts of liabilities that may
ultimately result. As a result of the Chapter 11 cases and circumstances
relating to this event, including Macy's leveraged debt structure, and operating
losses and economic conditions, such realization of assets and liquidation of
liabilities are subject to significant uncertainty.
Generally, actions to enforce or otherwise effect the payment of
pre-petition liabilities are stayed while the Macy Debtors are under the
protection of the Bankruptcy Code. These liabilities are being resolved as part
of the reorganization proceedings. Additional liabilities subject to similar
resolution may arise as a result of claims filed by parties related to the
rejection of any executory contracts, including unexpired leases, and from the
Bankruptcy Court's allowance for contingent and other disputed claims.
On February 13, 1992, the Bankruptcy Court entered a final order approving a
debtor-in-possession financing arrangement under a Revolving Credit and Guaranty
Agreement, dated as of January 27, 1992 (which, as amended, through March 31,
1993, is referred to herein as the "Post-Petition Credit Agreement"), among
Macy's, as Borrower, each of the other Macy Debtors, as guarantors, Chemical
Bank, as administrative agent, Bankers Trust Company, as co-agent, and
50
<PAGE>
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
QUARTERS ENDED OCTOBER 29, 1994 (13 WEEKS) AND
OCTOBER 30, 1993 (13 WEEKS)
(UNAUDITED)
other financial institutions parties thereto that established a working capital
facility consisting of revolving credit loans and letters of credit.
On August 12, 1993, the Post-Petition Credit Agreement was amended and
restated on similar terms, as approved by a Bankruptcy Court order dated
September 8, 1993, pursuant to an Amended and Restated Credit and Guaranty
Agreement, among Macy's, as Borrower, each of the other Macy Debtors, as
guarantors, Chemical Bank, as administrative agent, Bankers Trust Company, as
co-agent, and the other financial institutions party thereto (as subsequently
amended, the "Amended and Restated Post-Petition Credit Agreement"). Under the
Amended and Restated Post-Petition Credit Agreement, the working capital
facility (the "Working Capital Facility"), consisting of revolving credit loans
and letters of credit, is in the aggregate maximum amount of $550,000,000. On
August 26, 1994, the maximum working capital facility was reduced at Macy's
option by $100,000,000 to $450,000,000 and on October 28, 1994, the maximum
working capital facility was further reduced at Macy's option by $50,000,000 to
$400,000,000 due to lower projected borrowing requirements. The Working Capital
Facility may be used to fund working capital, inventory purchases, capital
expenditures, and for other general corporate purposes of the Macy Debtors.
Borrowings under the Amended and Restated Post-Petition Credit Agreement are
conditioned upon, among other things, satisfaction of certain Borrowing Base (as
defined therein) requirements, and compliance with restrictions on capital
expenditures and certain other payments, as well as covenants relating to EBITDA
(earnings before interest, taxes, depreciation and amortization as defined in
the Amended and Restated Post-Petition Credit Agreement). The Amended and
Restated Post-Petition Credit Agreement terminates upon the earlier of (i)
August 1, 1995 or (ii) the substantial consummation of a plan of reorganization
of the Company or certain of its subsidiaries.
Claims in respect of indebtedness incurred by the Macy Debtors under the
Amended and Restated Post-Petition Credit Agreement are afforded superpriority
administrative expense claim status pursuant to applicable provisions of the
Bankruptcy Code.
Substantially all of Macy's pre-petition short and long-term debt at October
29, 1994 is in default of the terms of the applicable loan agreements and is
subject to settlement under the reorganization process. For financial reporting
purposes, these liabilities, which are being resolved as part of the Chapter 11
process, have been segregated and reclassified as "Obligations Subject to
Settlement Under Reorganization Proceedings." Payment of certain pre-petition
liabilities that were approved for payment by the Bankruptcy Court or are
pending approval have been included in the appropriate liability captions.
51
<PAGE>
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
QUARTERS ENDED OCTOBER 29, 1994 (13 WEEKS) AND
OCTOBER 30, 1993 (13 WEEKS)
(UNAUDITED)
The estimated obligations at October 29, 1994 that are subject to settlement
as part of a plan of reorganization are listed below.
<TABLE>
<S> <C>
Accounts payable and accrued liabilities.................. $ 705,073,000
Accrued interest on long-term debt........................ 521,716,000
Secured debt.............................................. 2,320,632,000
Unsecured debt............................................ 1,265,611,000
Obligations under capitalized leases...................... 10,017,000
Other long-term liabilities............................... 218,606,000
Convertible preferred stock (redeemable).................. 637,315,000
--------------
$5,678,970,000
--------------
--------------
</TABLE>
Generally, interest on pre-petition debt does not accrue after the
commencement of the Chapter 11 case. If the debts are secured by property with a
value that is greater than the amount of the debt, interest may accrue up to the
value of the collateral. Macy's was accruing interest on secured debt pending
obtaining an estimate of the fair market value of the property securing such
debt. Following negotiations with representatives of the various secured lenders
and the development of the Plan in fiscal 1994, Macy's revised estimates for the
post-petition accrued interest that would be paid upon confirmation of the Plan.
Accordingly, the accrual of interest expense on certain secured debt instruments
ceased. Interest expense on certain other pre-petition secured debt continues to
be accrued but remains subject to settlement. Such accrual of interest on
secured indebtedness is being recorded at the interest rates applicable under
the respective loan agreements without regard to default and penalty provisions
contained therein. Macy's has ceased accruing interest expense on unsecured
debt. Contractual interest not recorded on such unsecured debt aggregated
$53,809,000 in each of the fiscal quarters ended October 29, 1994 and October
30, 1993. Contractual interest not recorded on secured debt aggregated
$17,754,000 for the quarter ended October 29, 1994.
Numerous claims have been asserted in respect of various pre-petition
obligations, which claims individually or in the aggregate may be material and
may not currently be reflected as obligations subject to settlement. The last
day on which these claims may be filed against the Macy Debtors, with certain
exceptions, was December 15, 1992, and over 17,000 claims aggregating an amount
substantially in excess of the amounts reported in the Condensed Consolidated
Statement of Financial Condition under the caption "Obligations Subject to
Settlement Under Reorganization Proceedings" have been filed as of November 26,
1994. Based on an ongoing review and reconciliation of claims, Macy's believes
that a number of these claims are duplicative of an/or supersede claims
previously asserted. In addition, claims have been filed which do not state a
specific claim amount or as to which a specific claim amount is not readily
determinable. Pursuant to Bankruptcy Court orders entered in 1993, certain exact
duplicate claims and duplicate bondholder claims were expunged. In March 1994,
the Bankruptcy Court ordered the expunging and disallowing of certain proofs of
claims which had been filed after the December 15, 1992 bar date. Claims will
continue to be reviewed and analyzed by Macy's as part of the claims
reconciliation process and objections filed as required. As this review process
continues, the aggregate amount
52
<PAGE>
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
QUARTERS ENDED OCTOBER 29, 1994 (13 WEEKS) AND
OCTOBER 30, 1993 (13 WEEKS)
(UNAUDITED)
included in the estimate of petition date obligations subject to settlement may
increase or otherwise be adjusted to reflect the ongoing analyses of claims
filed and the aggregate amounts which may be allowed in respect thereof. Macy's,
at this time, cannot make a prediction as to the aggregate amount of claims
allowed or the ultimate treatment of such allowed claims under a plan of
reorganization.
Commencing on the Chapter 11 filing date, Macy's ceased accruing dividends
on its Convertible Preferred Stock (redeemable) (referred to in these Condensed
Consolidated Financial Statements as "Preferred Stock") and has included the
Preferred Stock and the cumulative accrued but unpaid dividends prior to the
filing date on such stock on "Obligations Subject to Settlement Under
Reorganization Proceedings". Under applicable bankruptcy law, the holders of the
Preferred Stock of Macy's are not considered creditors. Under the Plan, all
common and Preferred Stock of Macy's will be cancelled and no distributions will
be made on account of such equity interests.
4. In October 1994, Macy's recorded an unusual charge of $80,000,000
relating to a portion of the severance and related costs resulting from the
proposed Merger (see Note 2). These severance and other costs are primarily
related to the terminations associated with the elimination of Macy's corporate
offices (including the positions of chief executive officer and chief operating
officer) and certain store group executives.
5. The reorganization items--net occurring as a result of the Chapter 11
proceedings have been segregated from operations. The major components of the
reorganization items--net are:
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
--------------------------------
OCTOBER 29, OCTOBER 30,
1994 1993
-------------- --------------
<S> <C> <C>
Professional fees and other expenses directly
related to the bankruptcy................... $ 7,961,000 $8,534,000
Less: Interest earned on accumulated cash
resulting from the Chapter 11 proceedings... (1,221,000) (466,000)
-------------- --------------
$ 6,740,000 $8,068,000
-------------- --------------
-------------- --------------
</TABLE>
6. The value of merchandise inventories is determined by the lower of LIFO
(last-in, first-out) cost using the retail inventory method or market for about
75% of the total inventory, and the lower of the FIFO (first-in, first-out) cost
using the retail inventory method or market for the balance of the inventory. If
inventories had been valued at the lower of FIFO cost or market, inventories
would have increased by $121,735,000, $107,563,000 and $119,235,000 at October
29, 1994, October 30, 1993 and July 30, 1994, respectively.
7. The Financial Accounting Standards Board Statement No. 109, "Accounting
for Income Taxes" ("FASB 109") was adopted as of August 1, 1993. FASB 109
requires, in the year of adoption, an adjustment of certain assets and
liabilities that resulted from certain business combinations, such as the 1986
Acquisition. This statement requires that a deferred tax liability be recognized
for the tax effects of taxable temporary differences and deferred tax assets for
the tax
53
<PAGE>
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
QUARTERS ENDED OCTOBER 29, 1994 (13 WEEKS) AND
OCTOBER 30, 1993 (13 WEEKS)
(UNAUDITED)
effects of deductible temporary differences, tax credit carryforwards and
operating loss carryforwards. The adoption of FASB 109 resulted in a favorable
cumulative effect adjustment of $185,340,000. Income tax benefit for the
quarters ended October 29, 1994 and October 30, 1993 was calculated in
accordance with FASB 109.
At October 29, 1994, Macy's had a deferred tax asset of $286,742,000
representing primarily a federal income tax benefit offset by a valuation
allowance of like amount.
In September 1994, the California Franchise Tax Board approved a settlement
of approximately $17 million relating to fiscal years 1976 through 1991 which
resulted in net benefit of $14.8 million. Such benefit was recorded in the
quarter ended October 29, 1994.
On November 9, 1994, Macy's entered into a closing agreement with the
Internal Revenue Service which fixed the net operating loss carryover for
federal tax purposes at $815,146,000 through fiscal year 1993. Such closing
agreement resulted in a state tax benefit of approximately $11,200,000. Macy's
estimates that the federal net operating loss carryover will increase by
$232,000,000 for fiscal year 1994 results (with the aggregate net operating loss
carryover at July 30, 1994 of $1,047,146,000). The loss carryover will be
available to offset future taxable income through the year 2009. The ability of
the Combined Company to utilize such loss carryover is dependent upon a number
of factors. There is no expiration date on approximately $12,000,000 of the tax
credit carryforwards.
8. The Financial Accounting Standards Board No. 112, "Accounting for Post
Employment Benefits" (FASB 112"), was adopted as of July 31, 1994. FASB 112
requires Macy's to recognize, during the employees active years of service, an
obligation for post employment benefits provided to former or active employees,
after employment but before retirement. The adoption of FASB 112 resulted in an
unfavorable cumulative effect adjustment (non-cash) of $10,657,000 net of taxes.
9. Net retail sales included sales from licensed departments of $18,877,000
and $15,159,000 for the quarters ended October 29, 1994 and October 30, 1993.
10. Primary earnings/(loss) per share of common stock attributable to common
stockholders was computed based upon the weighted average number of shares
outstanding during the period. Fully diluted earnings per share of common stock
assumed the conversion of Preferred Stock. The effect of the assumed conversion
of the Preferred Stock on the amounts per share for the quarter ended October
29, 1994 is antidilutive and therefore only primary earnings/(loss) per share of
common stock is presented.
11. In November 1994, Macy's and Federated announced plans to discontinue
operations of the I. Magnin retail store group. Four or more I. Magnin locations
are expected to be converted to Macy's or Bullock's stores. Options for the
remaining locations will be explored. The costs associated with the
discontinuation of the I. Magnin operations have not been estimated at this
time.
12. Certain reclassifications have been made to the October 30, 1993
condensed consolidated financial statements to conform with classifications used
at October 29, 1994.
54
