SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the fiscal quarter ended
October 30, 1999.
FEDERATED DEPARTMENT STORES, INC.
151 West 34th Street
New York, New York 10001
(212) 494-1602
and
7 West Seventh St.
Cincinnati, Ohio 45202
(513) 579-7000
Delaware 1-13536 13-3324058
(State of (Commission File No.) (I.R.S. Employer
Incorporation) Identification Number)
The Registrant has filed all reports required to be filed by
Section 12, 13 or 15(d) of the Act during the preceding 12
months and has been subject to such filing requirements for the
past 90 days.
209,973,378 shares of the Registrant's Common Stock, $.01 par
value, were outstanding as of November 27, 1999.
PART I -- FINANCIAL INFORMATION
FEDERATED DEPARTMENT STORES, INC.
Consolidated Statements of Income
(Unaudited)
(millions, except per share figures)
13 Weeks Ended 39 Weeks Ended
October 30, October 31, October 30, October 31,
1999 1998 1999 1998
Net Sales $4,242 $3,647 $12,060 $10,626
Cost of sales 2,543 2,229 7,218 6,436
Selling, general and
administrative expenses 1,397 1,161 3,997 3,485
Operating Income 302 257 845 705
Interest expense (95) (74) (260) (233)
Interest income 4 2 9 10
Income Before Income Taxes
and Extraordinary Item 211 185 594 482
Federal, state and local
income tax expense (88) (75) (247) (205)
Income Before Extraordinary
Item 123 110 347 277
Extraordinary Item - loss on
early extinguishment of
debt, net of tax effect - (23) - (23)
Net Income $ 123 $ 87 $ 347 $ 254
(Continued)
PART I -- FINANCIAL INFORMATION
FEDERATED DEPARTMENT STORES, INC.
Consolidated Statements of Income
(Unaudited)
(millions, except per share figures)
13 Weeks Ended 39 Weeks Ended
October 30, October 31, October 30, October 31,
1999 1998 1999 1998
Basic Earnings per Share:
Income before
extraordinary item $ .59 $ .53 $ 1.65 $ 1.32
Extraordinary item - (.11) - (.11)
Net income $ .59 $ .42 $ 1.65 $ 1.21
Diluted Earnings per Share:
Income before
extraordinary item $ .56 $ .50 $ 1.58 $ 1.24
Extraordinary item - (.10) - (.10)
Net income $ .56 $ .40 $ 1.58 $ 1.14
The accompanying notes are an integral part of these unaudited
Consolidated Financial Statements.
FEDERATED DEPARTMENT STORES, INC.
Consolidated Balance Sheets
(Unaudited)
(millions)
October 30, January 30, October 31,
1999 1999 1998
ASSETS:
Current Assets:
Cash $ 595 $ 307 $ 164
Accounts receivable 3,731 2,209 2,107
Merchandise inventories 4,741 3,259 4,322
Supplies and prepaid expenses 269 117 120
Deferred income tax assets 162 80 105
Total Current Assets 9,498 5,972 6,818
Property and Equipment - net 6,739 6,572 6,406
Intangible Assets - net 1,771 631 670
Other Assets 551 289 323
Total Assets $ 18,559 $ 13,464 $ 14,217
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current Liabilities:
Short-term debt $ 2,078 $ 524 $ 699
Accounts payable and
accrued liabilities 3,688 2,446 2,998
Income taxes 84 98 22
Total Current Liabilities 5,850 3,068 3,719
Long-Term Debt 4,658 3,057 3,549
Deferred Income Taxes 1,345 1,060 1,024
Other Liabilities 582 570 557
Shareholders' Equity 6,124 5,709 5,368
Total Liabilities and
Shareholders' Equity $ 18,559 $ 13,464 $ 14,217
The accompanying notes are an integral part of these unaudited
Consolidated Financial Statements.
FEDERATED DEPARTMENT STORES, INC.
Consolidated Statements of Cash Flows
(Unaudited)
(millions)
39 Weeks Ended 39 Weeks Ended
October 30, 1999 October 31, 1998
Cash flows from operating activities:
Net income $ 347 $ 254
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 493 448
Amortization of intangible assets 57 20
Amortization of financing costs 5 6
Amortization of unearned restricted stock 1 1
Loss on early extinguishment of debt - 23
Changes in assets and liabilities:
Decrease in accounts receivable 109 335
Increase in merchandise inventories (1,317) (1,083)
Increase in supplies and prepaid expenses (67) (5)
Increase in other assets not separately
identified (18) (13)
Increase in accounts payable and accrued
liabilities not separately identified 741 443
Decrease in current income taxes (64) (51)
Increase in deferred income taxes 17 38
Increase (decrease) in other liabilities
not separately identified 3 (7)
Net cash provided by operating activities 307 409
Cash flows from investing activities:
Acquisition of Fingerhut Companies, Inc.,
net of cash acquired (1,539) -
Purchase of property and equipment (470) (377)
Capitalized software (34) -
Investments in affiliated companies (90) -
Disposition of property and equipment 32 28
Decrease in notes receivable - 200
Net cash used by investing activities (2,101) (149)
Cash flows from financing activities:
Debt issued 2,055 650
Financing costs (10) -
Debt repaid (158) (563)
Increase in outstanding checks 140 162
Acquisition of treasury stock - (531)
Issuance of common stock 55 44
Net cash provided (used) by
financing activities 2,082 (238)
(Continued)
FEDERATED DEPARTMENT STORES, INC.
Consolidated Statements of Cash Flows
(Unaudited)
(millions)
39 Weeks Ended 39 Weeks Ended
October 30, 1999 October 31, 1998
Net increase in cash $ 288 $ 22
Cash at beginning of period 307 142
Cash at end of period $ 595 $ 164
Supplemental cash flow information:
Interest paid $ 259 $ 235
Interest received 8 13
Income taxes paid (net of refunds received) 278 206
Schedule of noncash investing and financing
activities:
Debt assumed in acquisition 125 -
Equity issued in acquisition 12 -
Consolidation of net assets and debt of
previously unconsolidated subsidiary 1,132 -
Conversion of long-term debt to common stock - 344
The accompanying notes are an integral part of these unaudited
Consolidated Financial Statements.
FEDERATED DEPARTMENT STORES, INC.
Notes to Consolidated Financial Statements
(Unaudited)
1. Summary of Significant Accounting Policies
A description of the Company's significant accounting policies is
included in the Company's Annual Report on Form 10-K for the fiscal
year ended January 30, 1999 (the "1998 10-K"). The accompanying
Consolidated Financial Statements should be read in conjunction with
the Consolidated Financial Statements and notes thereto in the 1998
10-K.
Because of the seasonal nature of the general merchandising
business, the results of operations for the 13 and 39 weeks ended
October 30, 1999 and October 31, 1998 (which do not include the
Christmas season) are not indicative of such results for the fiscal
year.
Substantially all department store merchandise inventories are
valued by the retail method and stated on the LIFO (last-in, first-
out) basis, which is generally lower than market. Direct-to-
customer merchandise inventories are stated at the lower of FIFO
(first-in, first-out) cost or market.
The Consolidated Financial Statements for the 13 and 39 weeks ended
October 30, 1999 and October 31, 1998, in the opinion of management,
include all adjustments (consisting only of normal recurring
adjustments) considered necessary to present fairly, in all material
respects, the consolidated financial position and results of
operations of the Company and its subsidiaries.
2. Acquisition
On March 18, 1999, the Company purchased Fingerhut Companies, Inc.
("Fingerhut"), a database marketing company that sells a broad range
of products and services directly to consumers via catalogs, direct
marketing and the Internet. The total purchase price of the
Fingerhut acquisition was approximately $1,720 million, including
the assumption of $125 million of debt and transaction costs.
The Fingerhut acquisition is being accounted for under the purchase
method of accounting and, accordingly, the Company's results of
operations do not include any revenues or expenses related to the
acquisition prior to the closing date and the purchase price has
been allocated to Fingerhut's assets and liabilities based on the
estimated fair value of these assets and liabilities as of that
date.
3. Extraordinary Item
The extraordinary item for the 13 and 39 weeks ended October 31,
1998 represents costs of $23 million, net of income tax benefit of
$15 million, associated with the completion of a tender offer
pursuant to which the Company purchased and retired approximately
$340 million aggregate principal amount of its 10% Senior Notes due
2001.
FEDERATED DEPARTMENT STORES, INC.
Notes to Consolidated Financial Statements
(Unaudited)
4. Segment Data
The Company conducts its business through two segments, department
stores and direct-to-customer. The Company operates over 400
department stores throughout the country that sell a wide range of
merchandise, including men's, women's and children's apparel and
accessories, cosmetics, home furnishings and other consumer goods.
On March 18, 1999, the Company acquired Fingerhut which, together
with Bloomingdale's By Mail, Macy's By Mail, macys.com and certain
other direct marketing activities, comprises its direct-to-customer
segment. This segment sells a broad range of products and services
directly to consumers via catalogs, direct marketing and the
Internet. Corporate and other consists of the assets and
liabilities, and related income or expense, associated with the
corporate office and certain items managed on a company-wide basis
(e.g., intangibles, financial instruments, income taxes, retirement
benefits and properties held for sale or disposition).
The financial information for each segment is reported on the basis
used internally by the Company to evaluate performance and allocate
resources. Prior year results have not been restated to conform to
the current presentation as it is not practicable to do so.
13 Weeks Ended 39 Weeks Ended
October 30, October 31, October 30, October 31,
(millions) 1999 1998 1999 1998
Revenues by segment were
as follows:
Department Stores $3,751 $3,647 $10,969 $10,626
Direct-to-Customer 491 - 1,091 -
Total $4,242 $3,647 $12,060 $10,626
Operating income by segment
was as follows:
Department Stores $ 328 $ 285 $ 999 $ 804
Direct-to-Customer 25 - (4) -
Total segment operating
income 353 285 995 804
Corporate and other (51) (28) (150) (99)
Operating income $ 302 $ 257 $ 845 $ 705
Depreciation and amortization
by segment was as follows:
Department Stores $ 157 $ 150 $ 461 $ 445
Direct-to-Customer 11 - 28 -
Corporate and other 23 7 62 23
Total $ 191 $ 157 $ 551 $ 468
FEDERATED DEPARTMENT STORES, INC.
Notes to Consolidated Financial Statements
(Unaudited)
39 Weeks Ended
October 30, October 31,
(millions) 1999 1998
Year-to-date capital expenditures
(purchase of property and equipment)
by segment were as follows:
Department Stores $ 450 $ 374
Direct-to-Customer 20 -
Corporate and other - 3
Total $ 470 $ 377
Total assets for each segment at the end
of the reporting period were as follows:
Department Stores $13,604 $13,063
Direct-to-Customer 2,582 -
Corporate and other 2,373 1,154
Total $18,559 $14,217
5. Earnings Per Share
The following tables set forth the computation of basic and diluted
earnings per share based on income before extraordinary item:
13 Weeks Ended
October 30, 1999 October 31, 1998
Shares Income Shares Income
(millions, except per share data)
Income before extraordinary
item and average number
of shares outstanding 210.0 $ 123 206.8 $ 110
Shares to be issued under
deferred compensation plans .4 - .4 -
210.4 $ 123 207.2 $ 110
Basic earnings per share $ .59 $ .53
Effect of dilutive securities:
Warrants 7.3 6.7
Stock options 2.2 1.9
Convertible notes - - 6.6 1
219.9 $ 123 222.4 $ 111
Diluted earnings per share $ .56 $ .50
FEDERATED DEPARTMENT STORES, INC.
Notes to Consolidated Financial Statements
(Unaudited)
13 Weeks Ended
October 30, 1999 October 31, 1998
Shares Income Shares Income
(millions, except per share data)
Income before extraordinary
item and average number of
shares outstanding 209.3 $ 347 209.2 $ 277
Shares to be issued under
deferred compensation plans .4 - .3 -
209.7 $ 347 209.5 $ 277
Basic earnings per share $1.65 $1.32
Effect of dilutive securities:
Warrants 7.3 7.9
Stock options 2.4 2.4
Convertible notes - - 9.0 7
219.4 $ 347 228.8 $ 284
Diluted earnings per share $1.58 $1.24
In addition to the warrants and stock options reflected in the
foregoing tables, warrants and stock options to purchase 4.7
million and 4.5 million shares of common stock at prices ranging
from $44.91 to $79.44 per share were outstanding at October 30,
1999 and October 31, 1998, respectively, but were not included in
the computation of diluted earnings per share because the exercise
price thereof exceeded the average market price and would have been
antidilutive.
FEDERATED DEPARTMENT STORES, INC.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
The Company acquired Fingerhut on March 18, 1999. The acquisition
is being accounted for under the purchase method of accounting and,
accordingly, the Company's results of operations do not include any
revenues or expenses related to the acquisition prior to the closing
date. The results of operations of Fingerhut have been grouped with
the Company's Bloomingdale's By Mail, Macy's By Mail and macys.com
operations and certain other direct marketing activities as the
direct-to-customer segment.
For purposes of the following discussion, all references to "third
quarter of 1999" and "third quarter of 1998" are to the Company's 13-
week fiscal periods ended October 30, 1999 and October 31, 1998,
respectively, and all references to "1999" and "1998" are to the
Company's 39-week fiscal periods ended October 30, 1999 and October
31, 1998, respectively.
Results of Operations
Comparison of the 13 Weeks Ended October 30, 1999 and October 31,
1998
Net sales for the third quarter of 1999 totaled $4,242 million,
compared to net sales of $3,647 million for the third quarter of
1998, an increase of 16.3%. Net sales for department stores for
the third quarter of 1999 were $3,751 million compared to $3,647
million for the third quarter of 1998, an increase of 2.9%. On a
comparable store basis (sales from stores opened prior to February
1, 1998), net sales for the third quarter of 1999 increased 3.9%
compared to the third quarter of 1998. Net sales for the direct-to-
customer segment were $491 million for the third quarter of 1999.
Cost of sales was 60.0% of net sales for the third quarter of 1999,
compared to 61.1% for the third quarter of 1998. Cost of sales as a
percent of net sales for department stores improved 0.1% in the
third quarter of 1999 compared to the same period a year ago,
benefiting from the continued strength in consumer demand. The
lower cost of sales from the direct-to-customer segment in the third
quarter of 1999, compared to cost of sales for department stores,
along with the improvement in the cost of sales rate for department
stores contributed to the overall 1.1% decrease in the cost of sales
rate. Cost of sales was not impacted by the valuation of department
store merchandise inventory on the last-in, first-out basis in the
third quarter of 1999 or in the third quarter of 1998.
Selling, general and administrative ("SG&A") expenses were 32.9% of
net sales for the third quarter of 1999 compared to 31.8% for the
third quarter of 1998. Department store SG&A expenses improved 0.8%
as a percent of department store net sales, reflecting the impact of
higher sales with relatively flat nonpayroll expenses. The higher
SG&A expense rate for the direct-to-customer segment, including
recently launched businesses, and higher amortization expense due to
the Fingerhut acquisition combined to offset the improvement in the
department store SG&A expense rate and produce a 1.1% increase in
the overall SG&A expense rate compared to the third quarter of
1998.
Net interest expense was $91 million for the third quarter of 1999,
compared to $72 million for the third quarter of 1998. The higher
interest expense for the third quarter of 1999 is due mainly to the
increased outstanding debt resulting from the Fingerhut acquisition
and the consolidation of the Fingerhut Master Trust for financial
reporting purposes.
FEDERATED DEPARTMENT STORES, INC.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
The Company's effective income tax rate of 41.5% for the third
quarter of 1999 differs from the federal income tax statutory rate
of 35.0% principally because of the effect of state and local income
taxes and permanent differences arising from the amortization of
intangible assets and from other non-deductible items.
The extraordinary item of $23 million in the third quarter of 1998
represents the after-tax expenses associated with the completion of
a tender offer pursuant to which the Company purchased and retired
approximately $340 million aggregate principal amount of its 10%
Senior Notes due 2001.
Comparison of the 39 Weeks Ended October 30, 1999 and October 31,
1998
Net sales for 1999 totaled $12,060 million, compared to net sales of
$10,626 million for 1998, an increase of 13.5%. Net sales for
department stores for 1999 were $10,969 million compared to $10,626
million for 1998, an increase of 3.2%. On a comparable store basis
(sales from stores opened prior to February 1, 1998), net sales for
1999 increased 4.6% compared to 1998. Net sales for the direct-to-
customer segment were $1,091 million for 1999.
Cost of sales was 59.9% of net sales for 1999, compared to 60.6% for
1998. Cost of sales as a percent of net sales for department stores
in 1999 was flat compared to 1998. The lower cost of sales from the
direct-to-customer segment in 1999, compared to cost of sales for
department stores, contributed to the overall 0.7% improvement in
the cost of sales rate. Cost of sales was not impacted by the
valuation of department store merchandise inventory on the last-in,
first-out basis in 1999 or in 1998.
SG&A expenses were 33.1% of net sales for 1999 compared to 32.8% for
1998. Department store SG&A expenses improved 1.5% as a percent of
department store net sales, reflecting the impact of higher sales
with relatively flat nonpayroll expenses and lower bad debt expense,
which was partially offset by reduced finance charge income
resulting from lower average receivable billings. The higher SG&A
expense rate for the direct-to-customer segment, including recently
launched businesses, and higher amortization expense due to the
Fingerhut acquisition combined to offset the improvement in the
department store SG&A expense rate and produce a 0.3% increase in
the overall SG&A expense rate compared to 1998.
Net interest expense was $251 million for 1999 compared to $223
million for 1998. The higher interest expense for 1999 is due
mainly to the increased outstanding debt resulting from the
Fingerhut acquisition and the consolidation of the Fingerhut Master
Trust for financial reporting purposes.
The Company's effective income tax rate of 41.6% for 1999 differs
from the federal income tax statutory rate of 35.0% principally
because of the effect of state and local income taxes and permanent
differences arising from the amortization of intangible assets and
from other non-deductible items.
FEDERATED DEPARTMENT STORES, INC.
Management's Discussion and Analysis
of Financial Condition and Results of Operations (Continued)
Liquidity and Capital Resources
The Company's principal sources of liquidity are cash from
operations, cash on hand and certain available credit facilities.
Net cash provided by operating activities in 1999 was $307 million,
compared to the $409 million provided in 1998. The improved
operating results were more than offset by smaller reductions in
customer accounts receivable, mainly as a result of higher credit
sales.
Net cash used by investing activities was $2,101 million for 1999,
including the purchase of Fingerhut. Investing activities for 1999
also included purchases of property and equipment totaling $470
million and $90 million invested in affiliated companies. The
Company opened three new department stores and one new furniture
gallery during 1999, and plans to open one additional department
store and one additional furniture gallery during the remainder of
the fiscal year.
Net cash provided by the Company from all financing activities was
$2,082 million for 1999. The Company funded the acquisition of
Fingerhut through a combination of cash on hand and short-term
borrowings. During March of 1999, the Company issued $350 million of
6.3% Senior Notes due 2009 and $400 million of 6.9% Senior
Debentures due 2029, the proceeds of which were used to refinance a
portion of the short-term borrowings used by the Company to acquire
Fingerhut. During 1999, the Company repaid debt of $158 million
consisting principally of the $125 million Senior Notes assumed in
the Fingerhut acquisition.
On November 23, 1999, the Company announced that it was resuming its
stock repurchase program, which had been suspended prior to the
acquisition of Fingerhut in March of 1999. The Company may from
time to time repurchase shares under the repurchase program,
depending on prevailing market conditions, alternate uses of capital
and other factors. The current authorization of the repurchase
program expires on January 29, 2000.
In July 1999, the Company took certain actions which required the
consolidation of the Fingerhut Master Trust for financial reporting
purposes. The principle assets and liabilities of the Fingerhut
Master Trust, which were not included in the Company's Consolidated
Financial Statements prior to July 31, 1999, consisted of accounts
receivable transferred by Fingerhut to the Trust in transactions
treated as sales under Statement of Financial Accounting Standards
No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities," and the related debt issued by
the Trust. As a result of the Company's actions, the transfer of
receivables and debt are being treated as secured borrowings as of
and subsequent to July 31, 1999. At July 31, 1999, these actions
increased net assets by $1,132 million, short-term debt by $232
million and long-term debt by $900 million.
Management believes the department store business and other retail
businesses will continue to consolidate. Accordingly, the Company
intends from time to time to consider additional acquisitions of,
and investments in, department stores, Internet-related companies,
catalog companies and other complementary assets and companies.
FEDERATED DEPARTMENT STORES, INC.
Management's Discussion and Analysis
of Financial Condition and Results of Operations (Continued)
Management of the Company believes that, with respect to its current
operations, cash on hand and funds from operations, together with
its credit facilities, will be sufficient to cover its reasonably
foreseeable working capital, capital expenditure and debt service
requirements. Acquisition transactions, if any, are expected to be
financed through a combination of cash on hand and from operations
and the possible issuance from time to time of long-term debt or
other securities. Depending upon conditions in the capital markets
and other factors, the Company will from time to time consider the
issuance of debt or other securities, or other possible capital
markets transactions, the proceeds of which could be used to
refinance current indebtedness or for other corporate purposes.
Year 2000
The Company relies on computer-based technology and utilizes a
variety of third-party hardware and proprietary and third-party
software. The Company's retail functions, such as merchandise
procurement and distribution, inventory control, point-of-sale
information systems and proprietary credit card account servicing,
generally use proprietary software, with third-party software being
used more extensively for administrative functions, such as
accounting and human resource management. In addition to such
information technology ("IT") systems, the Company's operations rely
on various non - IT equipment and systems that contain embedded
computer technology, such as elevators, escalators and energy
management systems. Third parties with whom the Company has
commercial relationships, including vendors of merchandise for
resale by the Company and of products and services used by the
Company in its operations (such as banking and financial services,
data processing services, telecommunications services and
utilities), are also highly reliant on computer-based technology.
In February 1996, the Company commenced an assessment of the
potential effects of the Year 2000 issue on the Company's business,
financial condition and results of operations. In conjunction with
such assessment, the Company developed and commenced the
implementation of the compliance program described below.
As discussed separately under the caption "Fingerhut" below,
Fingerhut undertook a similar program prior to being acquired by
the Company.
The Company's Year 2000 Compliance Program
Proprietary IT Systems. Pursuant to the Company's Year 2000
compliance program, the Company has undertaken an examination of the
Company's proprietary IT systems. All such systems that have been
identified as relating to a critical function and as not being Year
2000 compliant have been remediated or replaced. The Company
believes that the remediation of its other proprietary IT systems is
substantially complete, and all of the proprietary IT systems that
have been remediated have been installed and placed into production.
The Company commenced testing of such remediated systems for Year
2000 compliance in August 1998 and has completed a comprehensive,
integrated test of all of its main-frame and mid-range IT systems
(including third-party and proprietary hardware, software, network
components and interfaces) and has substantially completed varying
levels of follow-up testing of selected systems.
FEDERATED DEPARTMENT STORES, INC.
Management's Discussion and Analysis
of Financial Condition and Results of Operations (Continued)
Third-Party IT Systems. The strategy instituted by the Company to
identify and address Year 2000 issues affecting third-party IT
systems used by the Company includes contacting all third-party
providers of computer hardware and software to secure appropriate
representations to the effect that such hardware or software is or
will timely be Year 2000 compliant. The Company has received Year
2000 compliant versions of almost all third-party software and has
substantially completed testing of those third - party software
programs that have been identified as being critical to the
Company's operations.
Non-IT Systems. The Company has undertaken a review of its non-IT
systems and has substantially completed the remediation of those
systems that are within the Company's control. In addition, the
Company's centralized real estate department has communicated to the
developers, landlords and property managers of all of the Company's
properties the Company's expectation that the systems utilized in
the management and operation of such properties that are not within
the Company's control are or will timely be Year 2000 compliant. As
a further step, the Company has engaged in written or oral
communications with its key developers, landlords and property
managers in order to assess the Year 2000 readiness of such systems.
These communications have not revealed to the Company any
information that has caused the Company to believe that such systems
will fail to timely be Year 2000 compliant in any respect that is
material to the Company's business, financial condition or results
of operations.
Non-IT Vendors and Suppliers. The Company procures its
merchandise for resale and supplies for operational purposes from a
vast network of vendors located both within and outside the United
States, and is not dependent on any one vendor for more than 5% of
its merchandise purchases. The Company procures its private label
merchandise, which constitutes approximately 15% of the Company's
total sales, principally from manufacturers located outside the
United States. All of the Company's vendors have been notified in
writing of the Company's expectation that the systems and operations
of such vendors will timely be Year 2000 compliant. As a further
step, the Company has engaged in written or oral communications with
selected key vendors in order to assess the Year 2000 readiness of
their respective operations. These communications have not revealed
to the Company any information that has caused the Company to
believe that the operations of such vendors will fail to timely be
Year 2000 compliant in any respect that is material to the Company's
business, financial condition or results of operations.
Contingency Planning. The Company's Year 2000 compliance
program is directed primarily towards ensuring that the Company will
be able to continue to perform three critical functions: (i) effect
sales, (ii) order and receive merchandise, and (iii) pay its
employees. The Company has completed the development of a
contingency plan intended to address, to the extent within the
Company's reasonable control, the potential effects on these mission
critical functions of a failure of the Company's Year 2000
compliance program to be fully effective. The Company has designed
its contingency plan as an extension of its current business
recovery plan, which prescribes the measures to be taken upon the
occurrence of a variety of contingencies. In addition to relying on
the fundamental principles of recovery contained in the Company's
business recovery plan, the Company's Year 2000 contingency plan
focuses on assuring that key personnel - including managerial,
technical,
FEDERATED DEPARTMENT STORES, INC.
Management's Discussion and Analysis
of Financial Condition and Results of Operations (Continued)
maintenance, security and other personnel employed at its stores and
in its IT and logistics support functions - will
be available to identify and seek to rectify as promptly as possible
any disruptions that may result from the date change on January 1,
2000. The Company's contingency plan also provides for assuring
its ability to pay its employees by preprinting payroll checks
covering a few pay periods following December 31, 1999 and utilizing
electronic time clock data or historical data in the event it is
unable to access current payroll data. The Company has
substantially completed the dissemination of its contingency plan
Company-wide and currently is taking appropriate steps to ensure the
proper execution of such plan if necessary.
Fingerhut. Fingerhut implemented a program to address the
effects of the Year 2000 issue prior to being acquired by the
Company. The actions contemplated by Fingerhut's Year 2000
compliance program, including contingency planning, have been
substantially completed and substantially all of the costs Fingerhut
expected to incur have been incurred. The foregoing discussion of
the Company's Year 2000 compliance program does not address
Fingerhut's systems or vendors or any aspect of Fingerhut's Year
2000 compliance program. However, the discussion below of risks
associated with the Year 2000 issue apply equally to the Company and
Fingerhut and their respective Year 2000 compliance programs.
Costs. The Company (excluding Fingerhut) has incurred to date
approximately $37 million of costs to implement its Year 2000
compliance program, of which approximately 20% represents
capitalized expenditures for hardware purchases. The Company does
not expect that future expenditures relating to its Year 2000
compliance program will be material. All of the Company's Year 2000
compliance costs have been or are expected to be funded from
operating cash flows. The Company's Year 2000 compliance budget
does not include material amounts for hardware replacement because
the Company has historically employed a strategy to continually
upgrade its main-frame and mid-range computer systems and to install
state of the art point-of-sale systems with respect to both
pre-existing operations and in conjunction with the acquisitions and
mergers effected by the Company in recent years. Consequently, the
Company's Year 2000 budget has not required the diversion of funds
from or the postponement of the implementation of other planned IT
projects.
Risks. The novelty and complexity of the issues presented and the
proposed solutions therefor and the Company's dependence on the
technical skills of employees and independent contractors and on the
representations and preparedness of third parties are among the
factors that could cause the Company's Year 2000 compliance efforts
to be less than fully effective. Moreover, Year 2000 issues present
a number of risks that are beyond the Company's reasonable control,
such as the failure of utility companies to deliver electricity, the
failure of telecommunications companies to provide voice and data
services, the failure of financial institutions to process
transactions and transfer funds, the failure of vendors to deliver
merchandise or perform services required by the Company and the
collateral effects on the Company of the effects of Year 2000 issues
on the economy in general or on the Company's business partners and
customers in particular. Although the Company believes that its
Year 2000 compliance program, including its contingency plan, are
designed to appropriately identify and address those Year 2000
issues that are subject to the Company's reasonable control, there
can be no assurance that the Company's efforts in this regard will
be fully effective or that Year 2000 issues will not have a material
adverse effect on the Company's business, financial condition or
results of operations.
PART II -- OTHER INFORMATION
FEDERATED DEPARTMENT STORES, INC.
Item 5. Other Information
This report and other reports, statements and information
previously or subsequently filed by the Company with the
Securities and Exchange Commission (the "SEC") contain or may
contain forward-looking statements. Such statements are
based upon the beliefs and assumptions of, and on information
available to, the management of the Company at the time such
statements are made. The following are or may constitute
forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995: (i) statements
preceded by, followed by or that include the words "may,"
"will," "could," "should," "believe," "expect," "future,"
"potential," "anticipate," "intend," "plan," "estimate," or
"continue" or the negative or other variations thereof and
(ii) statements regarding matters that are not historical
facts. Such forward-looking statements are subject to
various risks and uncertainties, including (i) risks and
uncertainties relating to the possible invalidity of the
underlying beliefs and assumptions, (ii) possible changes or
developments in social, economic, business, industry,
market, legal and regulatory circumstances and conditions,
and (iii) actions taken or omitted to be taken by third
parties, including customers, suppliers, business partners,
competitors and legislative, regulatory, judicial and other
governmental authorities and officials. In addition to any
risks and uncertainties specifically identified in the text
surrounding such forward-looking statements, the statements
in the immediately preceding sentence and the statements
under captions such as "Risk Factors" and "Special
Considerations" in reports, statements and information filed
by the Company with the SEC from time to time constitute
cautionary statements identifying important factors that
could cause actual amounts, results, events and circumstances
to differ materially from those reflected in such forward-
looking statements.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Report on Form 8-K
Current Report on Form 8-K, dated August 31, 1999, reporting
matters under Items 5 and 7 thereof.
FEDERATED DEPARTMENT STORES, INC.
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 thereunder duly authorized.
FEDERATED DEPARTMENT STORES, INC.
Date December 14, 1999 /s/ Dennis J. Broderick
Dennis J. Broderick
Senior Vice President, General
Counsel and Secretary
/s/ Joel A. Belsky
Joel A. Belsky
Vice President and Controller
(Principal Accounting Officer)
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