=================================================================
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 (Date of earliest event reported)
September 16, 1998
SAKS INCORPORATED
(Exact name of registrant as specified in its charter)
Tennessee 1-13113 62-0331040
(State of incorporation) (Commission (I.R.S. Employer
File Number) Identification No.)
750 Lakeshore Parkway
Birmingham, Alabama 35211
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code (205) 940-4000
PROFFITT'S, INC.
(Former name or address, if changed since last report.)
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Item 2. Acquisition or Disposition of Assets
On September 17, 1998, the registrant, Saks Incorporated, a
Tennessee corporation ("Saks"), completed a merger (the "Merger")
with Saks Holdings, Inc., a Delaware corporation ("Saks Holdings")
in which a wholly owned subsidiary of Saks was merged with and into
Saks Holdings, with Saks Holdings surviving the merger as a wholly
owned subsidiary of Saks. In connection with the merger, each
outstanding common share $.01 par value of Saks Holdings was
converted into .82 shares of the common stock, $0.10 par value, of
Saks.
Saks Holdings is the holding company of Saks & Company, which
does business as Saks Fifth Avenue, Off 5th and Folio. Saks Fifth
Avenue is recognized worldwide as a premier fashion retailer,
offering the finest quality and latest style in women's and men's
apparel. Saks Fifth Avenue primarily sells better, bridge and designer
apparel, shoes, accessories, jewelry, cosmetics and fragrances for
women and men, as well as gift merchandise and children's apparel.
Item 5. Other Events
Effective September 17, 1998 the registrant changed its
corporate name from Proffitt's, Inc. to Saks Incorporated.
Item 7. Financial Statements and Exhibits
7(a) and 7(b). The financial statements and pro forma
financial information required by Items 7(a) and 7(b) have been
previously reported (as defined in Rule 12b-2 under the Securities
Exchange Act of 1934). The following financial information, which
has been restated to account for the merger as a pooling of
interests is included herewith:
Five Year Financial Summary
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Supplemental Consolidated Annual Financial Statements
Supplemental Consolidated Statements of Income --
Fiscal years ended January 31, 1998,
February 1, 1997 and February 3, 1996
Supplemental Consolidated Balance Sheets --
January 31, 1998 and February 1, 1997
Supplemental Consolidated Statements of
Shareholders' Equity -- Fiscal years ended
January 31, 1998, February 1, 1997 and
February 3, 1996
Supplemental Consolidated Statements of Cash
Flows -- Fiscal years ended January 31, 1998,
February 1, 1997 and February 3, 1996
Notes to Supplemental Consolidated Annual
Financial Statements
Supplemental Condensed Consolidated Financial Statements
(Unaudited)
Supplemental Condensed Consolidated Balance
Sheets -- August 1, 1998 and August 2, 1997
Supplemental Condensed Consolidated Statements
of Income -- Three and Six Months Ended August
1, 1998 and August 2, 1997
Supplemental Condensed Consolidated Statements
of Cash Flows -- Six Months Ended August 1,
1998 and August 2, 1997
Notes to Supplemental Condensed Consolidated
Financial Statements
Management's Discussion and Analysis of Financial
Condition and Results of Operations
7(c). The following exhibits are furnished as required by
Item 7(c):
Exhibit
Number Description
2.0 Agreement and Plan of Merger dated July 4, 1998,
among Proffitt's, Inc., Fifth Merger Corporation
and Saks Holdings, Inc. (Incorporated by reference
to Exhibit 2 to the Registrant's Current Report on
Form 8-K filed July 8, 1998).
4.1 Articles of Amendment to the Amended and Restated
Charter of Proffitt's, Inc. effective September
17, 1998.
4.2 Amended and Restated Bylaws of Proffitt's, Inc.
effective September 17, 1998.
10.0 Employment Agreement by and between Saks Holdings,
Inc., Proffitt's, Inc. and Philip B. Miller dated
as of September 3, 1998.
27.0 Financial Data Schedule
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 hereunto duly authorized.
SAKS INCORPORATED
Date: September 23, 1998
By: /s/ Brian J. Martin
__________________________
Brian J. Martin,
Executive Vice President
of Law and General
Counsel
Five Year Financial Summary
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
52 52 53 52 52
Weeks Weeks Weeks Weeks Weeks
Ended Ended Ended Ended Ended
1/31/98 2/1/97 2/3/96 1/28/95 1/29/94
-------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Consolidated Income Statement Data:
Net sales $5,726,346 $4,926,862 $4,422,107 $4,085,595 $3,600,897
Cost of sales 3,731,293 3,208,989 2,900,026 2,665,525 2,357,829
---------- ---------- ---------- ---------- ----------
Gross margin 1,995,053 1,717,873 1,522,081 1,420,070 1,243,068
Selling, general, and admin-
istrative expenses 1,165,118 1,057,144 961,407 852,896 784,091
Other operating expenses 444,276 367,247 330,634 317,585 328,288
Expenses related to attempted
Younkers takeover 10,017
(Gains) losses from long-lived
assets (134) 1,406 (36,058)
Merger, restructuring and
integration charges 36,524 16,929 64,237 2,000 179,731
Year 2000 expenses 6,590
ESOP expenses 9,513 3,910 2,931 2,787 2,939
---------- ---------- ---------- ---------- ----------
Operating income (loss) 333,166 271,237 188,913 244,802 (51,981)
Other income (expense)
Interest expense (113,685) (114,881) (141,725) (117,065) (99,205)
Other income (expense), net 2,330 (11,780) 4,051 4,826 4,063
Reorganization items (219,857)
---------- ---------- ---------- ---------- ----------
Income (loss) before pro-
vision for income taxes
and extraordinary items
and cumulative effect of
changes in accounting
methods 221,811 144,576 51,239 132,563 (366,980)
Provision (benefit) for income
taxes (194,426) 50,998 48,914 58,112 34,432
---------- ---------- ---------- ---------- ----------
Income (loss) before extra-
ordinary items and cumul-
ative effect of changes in
accounting methods 416,237 93,578 2,325 74,451 (401,412)
Extraordinary loss on debt,
net of taxes (11,323) (12,746) (8,051) (535) (28,728)
Extraordinary gain on reorg-
anization, net of taxes 212,139
Cumulative effect of changes in
accounting methods, net of
taxes (12,090)
---------- ---------- ---------- ---------- ----------
Net income (loss) $404,914 $80,832 $(5,726) $73,916 $(230,091)
========== ========== ========== ========== ==========
Basic earnings (loss) per
common share before extra-
ordinary items and cumul-
ative effect $3.03 $0.72 $0.00 $0.62 $(3.44)
Basic earnings (loss) per
common share $2.94 $0.62 $(0.07) $0.62 $(1.97)
Diluted earnings (loss) per
common share before extra-
ordinary items and cumul-
ative effect $2.86 $0.70 $0.00 $0.61 $(3.44)
Diluted earnings (loss) per
common share $2.79 $0.60 $(0.07) $0.61 $(1.97)
Weighted average common shares
Basic 137,588 125,056 111,974 117,217 116,590
Diluted 149,085 132,583 113,309 118,504 116,590
Consolidated Balance Sheet Data:
Working capital $1,090,304 $951,752 $710,468 $777,444 $801,589
Total assets $4,270,253 $3,630,276 $2,899,565 $2,908,258 $2,593,779
Senior long-term debt, less
current portion $1,093,806 $863,475 $1,256,349 $1,263,147 $1,171,817
Subordinated debt $286,964 $501,767 $150,505 $150,269 $ 136,250
Shareholders' equity $1,944,529 $1,397,934 $691,059 $739,893 $658,101
</TABLE>
Management's Discussion & Analysis
On September 17, 1998, Saks Holdings, Inc. ("SFA") merged with and
into a wholly owned subsidiary of Proffitt's, Inc. SFA is the
holding company of Saks & Company which does business as Saks Fifth
Avenue, Off 5th, Folio and Bullock & Jones. The merger provided for
the exchange of each outstanding share of SFA Common Stock for .82
shares of Proffitt's, Inc. Common Stock. In connection with the
merger, Proffitt's, Inc. changed the corporate name of Proffitt's,
Inc. to Saks Incorporated.
Saks Incorporated (formerly Proffitt's, Inc. and hereinafter
the "Company"), is a national retailer principally operating 331
premier and traditional department stores under the following
names: Saks Fifth Avenue (56 stores), Off 5th (39 stores),
Proffitt's (24 stores), McRae's (29 stores), Younkers (51 stores),
Parisian (39 stores), Herberger's (37 stores), Carson Pirie Scott
("Carson's") (30 stores), Bergner's (13 stores), Boston Store (12
stores) and Bullock & Jones (1 store). The Company also operates a
direct mail business, under the Folio and Bullock & Jones names.
The Company's major acquisitions are outlined below:
<TABLE>
<CAPTION>
Current Number Date Accounting
Name Headquarters of Stores Locations Acquired Treatment
- ---------- ---------- --------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
McRae's Jackson, MS 31 Southeast March 31, 1994 Purchase
Younkers Des Moines, IA 50 Midwest February 3, 1996 Pooling
Parisian Birmingham, AL 40 Southeast/Midwest October 11, 1996 Purchase
Herberger's St. Cloud, MN 37 Midwest February 1, 1997 Pooling
Carson Pirie Scott, Milwaukee, WI 55 Midwest January 31, 1998 Pooling
Boston Store,
and Bergner's
Saks Fifth New York, NY 95 National September 17, 1998 Pooling
Avenue, Off 5th
</TABLE>
Merchandising, sales promotion, and certain store operating
support functions are conducted in multiple locations. The
Proffitt's Merchandising Group, headquartered in Birmingham, was
formed in 1996 to ensure coordination of merchandise planning and
execution for the Company and the achievement of certain scale
economies while supporting the Company's strategy of tailoring
merchandising to local taste with regional assortments. Certain
back office administrative support functions for the Company, such
as accounting, credit administration, store planning, and
information technology, are centralized.
Income statement information for each year presented has been
restated to reflect the Younkers, Herberger's, Carson Pirie Scott
("Carson's"), and SFA mergers, which were accounted for as poolings
of interests. The operations of Parisian have been included in the
income statement subsequent to the October 11, 1996 purchase date.
The following table sets forth, for the periods indicated, certain
items from the Company's Supplemental Consolidated Statements of
Income, expressed as percentages of net sales (numbers may not
total due to rounding):
52 52 53
Weeks Weeks Weeks
Ended Ended Ended
1/31/98 2/1/97 2/3/96
("1997") ("1996") ("1995")
--------- --------- ---------
Net sales 100.0% 100.0% 100.0%
Cost of sales 65.2 65.1 65.6
--------- --------- ---------
Gross margin 34.8 34.9 34.4
Selling, general, and
administrative expenses 20.3 21.5 21.7
Other operating expenses 7.7 7.4 7.4
Expenses related to attempted
Younkers takeover 0.2
(Gains) losses from long-
lived assets (0.8)
Merger, restructuring, and
integration charges 0.6 0.3 1.5
Year 2000 expenses 0.1
ESOP expenses 0.2 0.1 0.1
--------- --------- ---------
Operating income 5.8 5.5 4.3
Other income (expense)
Interest expense (2.0) (2.3) (3.2)
Other income (expense), net (0.2) 0.1
--------- --------- ---------
Income before provision
for income taxes and
extraordinary loss 3.9 2.9 1.2
Provision (benefit) for
income taxes (3.3) 1.0 1.1
--------- --------- ---------
Income before extraordinary
loss 7.3 1.9 0.1
Extraordinary loss (net of
tax) (0.2) (0.3) (0.2)
--------- --------- ---------
Net income 7.1% 1.6% (0.1)%
======== ======== =========
Net Sales
Total Company net sales increased by 16%, 11%, and 8% in 1997,
1996, and 1995, respectively. The 1997 increase primarily was due
to a comparable store sales increase of 5% and incremental revenues
generated from new store additions during 1997 and 1996 combined
with the full year inclusion of Parisian which was acquired in
October 1996. The 1996 increase primarily was due to a comparable
store sales increase of 6% and new store additions during 1996 and
1995 and a partial year of revenues generated from Parisian. In
1995, comparable store sales increased 6%.
Gross Margins
Gross margins were 34.8%, 34.9%, and 34.4% in 1997, 1996, and 1995,
respectively. The Company uses a full-cost method to account for
inventories and cost of sales, which includes certain purchasing
and distribution costs.
The decrease in gross margin percent from 1996 to 1997 was
primarily due to increased penetration in certain lower margin
categories, spring sales shortfalls in bridge apparel, higher
inventory shortage and processing costs associated with a new
distribution center offset by enhanced buying power with core
vendors due to the Company's increased scale, expansion of key
brands and benchmarking of operations.
The improvement in gross margin percent from 1995 to 1996 was
primarily due to increased leverage of costs associated with the
comparable sales growth, expansion of higher margin merchandise
categories and continued focus on benchmarking of operations.
Management believes the merchandising operations of the
business can be further enhanced through continued execution of
the Company's best practices and benchmarking process as well as
through the introduction of a new private brand program in its
non-SFA stores beginning in fall 1998 and the expansion of existing
private brand offerings in the SFA stores. While the Company
anticipates that it will continue to emphasize premier national
brands and exclusive designer labels in its stores, management's
goal is to significantly increase the private brand business.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses ("SG&A") were 20.3%
of net sales in 1997, 21.5% of net sales in 1996, and 21.7% of net
sales in 1995. The reduction of the SG&A percentage from 1995 to
1997 was due to increased economies of scale and the implementation
of the synergies associated with the Company's recent acquisitions
and targeted cost savings programs combined with increases in net
finance charge income. The improvement was also impacted by SFA's
implementation of cost reduction initiatives during 1997.
Management identified synergies in conjunction with the
Younkers, Parisian, Herberger's, and Carson's business
combinations. The implementation of these synergies reduced
operating expenses by a total of $6 million in 1996 and $20 million
in 1997. Incremental savings relating to these mergers of
approximately $15 million are planned in 1998. In connection with
the SFA merger, the Company identified synergies and cost reduction
opportunities that are expected to be realized in late 1998 and
1999. The Company expects savings of approximately $12 million in
1998 and $60 to $70 million in 1999 relating to the SFA merger.
Cost reductions are being achieved through the elimination of
duplicate corporate expenses, economies of scale, implementation of
best practices, and consolidation of certain administrative support
functions. These changes are expected to deliver future additional
leverage on expenses.
Finance charge income derived from the Company's proprietary
credit cards is included as a component of SG&A. Gross finance
charge income (before allocation of finance charges to the third
party purchasers of accounts receivable (see "Liquidity")), was
$198.5 million, $170.9 million and $156.4 million in 1997, 1996 and
1995 respectively. This increase since 1995 is due to increased
penetration and certain credit card term changes combined with the
successful May 1997 introduction of a proprietary charge card at
Herberger's. The allocation of finance charges to the third party
purchasers of accounts receivable totaled approximately $47.3
million in 1997; $40.7 million in 1996; and $32.9 million in 1995.
Utilization of the Company's accounts receivable securitization
programs increased each year presented (see "Liquidity")
commensurate with the Company's growth in proprietary charge card
sales.
Effective February 1998, all of the Company's proprietary
credit cards (exclusive of the SFA proprietary credit cards) are
issued by the National Bank of the Great Lakes (the "Bank"), the
credit card bank acquired in conjunction with the Carson's merger
(see "Liquidity"). The Bank is able to assess uniform finance
charges (including late fees) in all twenty-four states in which
the Company operates non-SFA stores. This is believed to have
positive implications for increasing future finance charge income.
The Bank is expected to become the issuer of SFA credit cards in
late 1998.
Other Operating Expenses
Other operating expenses were 7.7% of net sales in 1997, compared
to 7.4% in both 1996 and 1995. The percent increase in 1997 over
1996 and 1995 levels primarily resulted from increased property and
rental expense due in large part to the addition of Parisian, which
has a higher proportion of properties which are leased versus
owned.
Expenses Related to Attempted Takeover of Younkers
During 1995, the Company incurred expenses of approximately $10.0
million, or 0.2% of net sales, related to the attempted hostile
takeover of Younkers by Carson's and Younkers' defense of such
attempt.
(Gains) Losses from Long-Lived Assets
In March 1995, the Company sold eight Carson's stores (principally
buildings and real estate) located in Minnesota ("Minnesota
Stores") for net proceeds of $70.8 million. The assets sold had a
carrying value of $9.5 million. In addition, the Company liquidated
all inventory, fixtures, and accounts receivable related to the
Minnesota Stores for net proceeds of approximately $30.0 million.
After closing costs, a gain totaling $55.2 million was recorded in
1995.
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of." The Company adopted the provisions of this new
standard in the fourth quarter of 1995 and as a result of closing
certain stores and related facilities, the Company incurred
impairment charges totaling $19.1 million in 1995. Of the $19.1
million total, $15.9 million related to the write-down in carrying
value of six store properties and $3.2 million related to the
write-down of abandoned property.
After recognition of the $55.2 million gain recorded from the
Minnesota Stores and the impairment write-down of $19.1 million,
the Company realized a net gain on long-lived assets of $36.1
million, or 0.8% of net sales, in 1995.
Merger, Restructuring, and Integration Charges
In connection with the Company's mergers with Carson's,
Herberger's, and Younkers and the acquisition of Parisian, the
Company incurred certain costs to effect the transactions and other
costs to restructure, integrate, and combine the operations of the
companies. SFA also incurred certain costs in 1995 relating to an
acquisition of former I. Magnin store locations and exit cost
associated with the relocation of distribution facilities.
For 1997, these costs totaled $36.5 million, or 0.6% of net
sales. The 1997 charges were comprised of: (i) $13.8 million of
Carson's merger transaction costs (principally investment banking,
legal, and accounting fees and other direct merger costs); (ii)
$17.3 million of restructuring and integration charges associated
with the Carson's merger related principally to such items as
severance, the consolidation of administrative operations, and the
write-off of duplicate assets; and, (iii) $12.4 million of
continuing integration costs related to mergers and acquisitions
over the prior two years offset by a $7 million decrease in the
estimated costs to exit the SFA Yonkers distribution facility.
For 1996, these charges totaled $16.9 million, or 0.3% of net
sales. The 1996 charges were comprised of: (i) $2.6 million of
Herberger's merger transaction costs (principally investment
banking, legal, and accounting fees and other direct merger costs);
(ii) $7.4 million of restructuring and integration charges
associated with the Herberger's merger related principally to such
items as severance, the consolidation of administrative operations,
and the write-off of duplicate assets; (iii) $5.9 million related
to the continuing integration of the Younkers operations; and, (iv)
$1 million relating to consulting and advisory fees paid to a
shareholder of SFA.
For 1995, these charges totaled $64.2 million, or 1.5% of net
sales. The 1995 charges were comprised of: (i) $8.8 million of
Younkers' merger transaction costs (principally investment banking,
legal, and accounting fees and other direct merger costs); (ii)
$12.0 million of restructuring and integration charges associated
with the Younkers merger related principally to such items as
severance, the consolidation of administrative operations, and the
write-off of duplicate assets, (iii) $19.0 million relating to exit
costs associated with the relocation of distribution activities at
SFA; (iv) $8.9 million of integration costs associated with SFA's
acquisition of former I. Magnin store locations; (v) $8.5 million
related to the writeoff of certain EDP software at SFA which became
obsolete; and, (vi) $7.0 million of consulting and advisory fees
paid to a shareholder of SFA.
Management also expects to incur certain additional
integration costs in 1998, primarily related to the integration of
redundant and duplicative systems and assets accumulated through
the series of acquisitions over the prior two years. These expenses
(exclusive of expenses associated with the SFA merger) are expected
to total approximately $21 million to $27 million in 1998. The
Company will incur merger, restructuring and integration costs
associated with the SFA merger during 1998 and 1999. Management is
currently reviewing the Company's operations and expects to develop
an estimate of such costs by the end of 1998.
Year 2000 Expenses
The Year 2000 Issue is the result of computer programs being
written using two digits rather than four to define the applicable
year. Some of the Company's computer programs that have
date-sensitive software may potentially recognize a date using "00" as
the year 1900 rather than the Year 2000. This could result in a
system failure or miscalculations causing disruptions of
operations, including among other things, a temporary inability to
process transactions, send invoices, or engage in similar normal
business activities. The Company's non information technology
system (e.g., alarm systems) may also be affected by the Year 2000
issue.
The Company is modifying or replacing significant portions of
its software so that its computer systems will properly utilize
dates beyond December 31, 1999. The Company presently believes that
with modifications to existing software, conversions to new
software, and changes to non-information technology systems, the
Year 2000 Issue can be mitigated.
The Company has initiated formal communications with all of
its significant suppliers to determine the extent to which the
Company is vulnerable to failure of those third parties' to
remediate their own Year 2000 Issue. The Company's total Year 2000
project cost and estimates to complete include the estimated costs
and time associated with the effect of a third party's Year 2000
Issue, and are based on presently available information.
The Company is utilizing both internal and external resources
to reprogram, or replace, and test the software for Year 2000
modifications. During 1997, the Company substantially completed its
assessment of the Year 2000 Issue and began systems modifications,
resulting in charges of $6.6 million, or 0.1% of net sales, in
1997. The Company expects to incur additional Year 2000 charges estimated
to be $9 million and $3 million in 1998 and 1999,
respectively, including SFA. The Company is meeting its internal
modification schedule and expects to complete the Year 2000 project
by March 1999.
The costs of the project and the date on which the Company
plans to complete the modifications are based on management's best
estimates, which were derived utilizing assumptions of future
events including the continued availability of certain resources,
third party modification plans, and other factors. However, there
can be no guarantee that these estimates will be achieved, and
actual results could differ materially from those plans. Specific
factors that might cause such differences include, but are not
limited to, the availability and cost of personnel trained in this
area, the ability to locate and correct all relevant computer
codes, and similar uncertainties.
ESOP Expenses
Herberger's had an Employee Stock Ownership Plan ("ESOP"), which
was terminated on December 31, 1997. Charges related to the ESOP
totaled $9.5 million, or 0.2% of net sales, in 1997. Of this total,
$7.9 million related to the termination of the plan. ESOP charges
totaled $3.9 million, or 0.1% of net sales, and $2.9 million, or
0.1% of net sales, in 1996 and 1995, respectively.
Interest Expense
Total interest expense was $113.7 million, $114.9 million, and
$141.7 million in 1997, 1996, and 1995, respectively. Interest
expense as a percentage of net sales was 2.0% for 1997, 2.3% for
1996, and 3.2% for 1995. The decrease in interest expense in 1997
compared to 1996 was primarily due to: (i) the use of proceeds from
SFA's May 1996 initial public offering (IPO) to repay outstanding
indebtedness; (ii) the use of proceeds from SFA's convertible notes
offering in September 1996 to pay down higher cost debt; (iii)
improved cash flow from operations; and, (iv) lower interest rates
on the revolving credit facilities, offset by increased borrowing
costs associated with the October 1996 acquisition of Parisian and
increased capital and inventory investments. The decrease in
interest expense in 1996 compared to 1995 is primarily due to the
aforementioned SFA IPO and convertible notes issuance and lower
interest rates.
Other Income, Net
In 1996, the Company recorded a loss of $10.5 million, or 0.2% of
net sales, related to the write-down of County Seat Debentures (the
"Debentures"). Carson's received the Debentures in 1993 when County
Seat Holdings, Inc. exercised its option to exchange the Debentures
for other securities that had been issued to Carson's as part of
the sale price for Carson's 1989 divestiture of County Seat Stores,
Inc., to a management-led buyout group.
Income Taxes
The continued improvement in SFA's operating income in fiscal 1997,
as well as SFA's estimate of future profitability, enabled the
Company to recognize a $294,846 deferred tax asset in the fourth
quarter of 1997. The benefit reflects the elimination of the
valuation allowance relating to the tax benefit of SFA's net
operating loss carryforwards. The realization of this tax benefit
also enabled SFA to reduce goodwill by $34,525 due to SFA recording
certain assets and liabilities at their date of acquisition for
financial reporting purposes which were not recognized for income
tax purposes. In 1997, 1996 and 1995 the effective tax rates differ
from the normalized tax rates principally due to non-deductible
goodwill, ESOP charges, and merger related costs.
Net Income
Net income before extraordinary loss on extinguishment of debt was
$416.2 million in 1997, or 7.3% of net sales, $93.6 million in
1996, or 1.9% of net sales, and $2.3 million in 1995, or 0.1% of
net sales.
Extraordinary Item
During 1997, the Company made certain modifications to its capital
structure, including retiring approximately $114 million of 9-7/8%
Parisian Senior Subordinated Notes due 2003, prepaying
approximately $15 million of 11% of Junior Subordinated Notes,
prepaying certain mortgages and replacing the Company's existing
revolving credit and working capital facilities with a new
revolving credit facility. As a result of this early extinguishment
of debt, certain deferred costs and premiums associated with the
debt facilities, such as loan origination costs, were written off
resulting in a loss of $18.9 million ($11.3 million net of income
taxes).
In 1996 the Company recognized $12.7 million of extraordinary
charges associated with the prepayment of term borrowings under the
SFA Credit Facility, the repayment of outstanding balances on the
revolving credit portion of the SFA Credit Facility and the
prepayment of certain mortgages.
In 1995, Younkers canceled its $150 million revolving credit
agreement and replaced its debt financing of accounts receivable
with sales of ownership interests in its accounts receivable
resulting in a write-off of $3.4 million ($2.1 million net of
income taxes). In connection with SFA's real estate refinancings in
1995, the Company incurred $6.0 million in charges.
Inflation
Inflation affects the costs incurred by the Company in its purchase
of merchandise and in certain components of its SG&A expenses. The
Company attempts to offset the effects of inflation through price
increases and control of expenses, although the Company's ability
to increase prices is limited by competitive factors in its
markets.
Seasonality
The Company's business, like that of most retailers, is subject to
seasonal influences, with a significant portion of net sales and
net income realized during the fall season, which includes the
Christmas selling season. In light of these patterns, SG&A expenses
are typically higher as a percentage of net sales during the first
three quarters of each year, and working capital needs are greater
in the last two quarters of each year. The fall season increases in
working capital needs have typically been financed with internally
generated funds, the sale of interests in accounts receivable, and
borrowings under the Company's revolving credit facility.
Generally, more than 30% of the Company's net sales and over 50% of
net income are generated during the fourth quarter.
Liquidity and Capital Resources
Cash Flow
The Company's primary needs for liquidity are to acquire, renovate,
or construct stores, and to provide working capital for new and
existing stores.
Net cash provided by operating activities was $209.3 million
in 1997 and $140.7 million in 1996, principally representing net
income before depreciation and amortization charges and changes in
working capital needs.
Net cash used in investing activities was $319.0 million in
1997, which related to capital expenditures of $346.9 million
primarily for new store construction, store renovations, and
systems enhancements, netted against the proceeds from the sale of
assets of $27.9 million. Net cash used in investing activities was
$330.6 million in 1996, of which $119.1 million was for the
acquisition of Parisian and $247.8 million was related to new store
construction, store renovations, systems enhancements, and other
capital expenditures.
Net cash provided by financing activities for 1997 totaled
$83.6 million, which was primarily due to $148.1 million of net
borrowings under the credit and receivables facilities and the
issuance of stock and the sale of treasury stock of $23.2 million
offset by net long term debt repayments of $53.3 million and the
repayment of $30 million of REMIC certificates. Net cash provided
by financing activities for 1996 totaled $186.7 million, which was
primarily due to proceeds of $457.5 million from the issuance of
stock and the sale of treasury stock offset by net repayments of
$237.5 million under the credit and receivables facilities, net
repayments of $9.3 million on long-term debt and $14.4 million of
treasury stock purchases.
The availability of net operating loss carryforwards and other
tax benefits generated in prior years by SFA and Carson's will
enable the Company to reduce its cash requirements for income tax
payments in the next several years from that which would otherwise
be payable.
Accounts Receivable Securitization: Younkers Master Trust Facility
In 1995, the Younkers Master Trust ("YMT") was established by
Younkers Credit Corporation ("YCC"), a wholly-owned, special
purpose subsidiary of the Company. YMT issued to third parties a
total of $75 million of asset backed securities in two separate
classes and issued a $50 million variable funding certificate to an
asset backed commercial paper based conduit. On May 6, 1998 YCC was
merged into Proffitt's Credit Corporation (see below).
Accounts Receivable Securitization: Proffitt's Credit Card Master
Trust Facility
In 1994, the Company (excluding Younkers, Carson's and SFA) began
selling an undivided interest in its accounts receivable. In 1997,
the Company, through its wholly-owned special purpose subsidiary,
Proffitt's Credit Corporation ("PCC"), entered into an agreement to
sell an undivided interest in the accounts receivable of the
Proffitt's, McRae's, and Parisian stores. This agreement provided
for the sales of receivables up to $300 million and contained
certain covenants requiring the maintenance of various financial
ratios. In May 1997, this agreement was modified to include the
accounts receivable of Herberger's.
In 1997, the Company completed a restructuring of its credit
card receivables (excluding Younkers, Carson's and SFA). Proffitt's
Credit Card Master Trust ("PCCMT") was formed by PCC and issued a
total of $200 million in five-year term asset back securities in
two separate classes. The proceeds of the certificates were used to
repay outstanding borrowings and to terminate the Younkers variable
funding arrangement discussed above.
Concurrent with the issuance of the term asset backed
securities, PCCMT issued to two co-purchasers, both of which are
asset backed commercial paper based conduits, a $125 million
variable funding certificate. In November 1997, the aggregate
principal amount of the variable funding certificate was increased
to $150 million.
Accounts Receivable Securitization: Saks Finance Company
SFA, through its wholly-owned special purpose subsidiary, Saks
Finance Company (SFC), has entered into agreements to securitize
most of its proprietary credit card receivables. In 1996, the trust
sold two series of certificates of beneficial interests with
subordinated structures. This issuance was in conjunction with the
previously existing trust entering its wind-down period, which was
completed in fiscal 1996. The first series is a term series with a
capacity of $413,000. The second series is a variable series with
a maximum capacity of $118,000. In August 1998, SFA executed a new
$397 million receivables securitization facility to finance the
monthly accumulation of cash required to repay the previously
issued and outstanding term series.
National Bank of the Great Lakes
On January 31, 1998, in connection with the Company's acquisition
of Carson's, the Company acquired the Bank. Following that
acquisition, on February 2, 1998, all of the Company's proprietary
credit card agreements (excluding SFA) with customers, and the
accounts related thereto, were contributed to the Bank pursuant to
the terms of the Contribution Agreement, dated as of January 31,
1998, by and between the Company and the Bank. The accounts
receivable generated by the Bank's credit card accounts maintained
for customers of the Company's Younkers stores remain subject to
the terms of the YMT, while the accounts receivable generated by
the Bank's credit card accounts maintained for customers of the
Company's Proffitt's, McRae's, Parisian, and Herberger's stores
remain subject to the terms of PCCMT.
Upon the acquisition of the Bank, the accounts receivable
generated by the Bank's credit card accounts maintained for
customers of the Company's Carson's, Boston Store, and Bergner's
stores were sold to PCC and then transferred to PCCMT. To
accommodate the increase in accounts receivable attributable to the
addition of these accounts, the principal amount of the 1997-1
Variable Funding Certificate was increased to $400 million.
As a result of the transactions discussed above, as of
February 2, 1998, the Bank became the sole originator of the
Company's proprietary credit card accounts (excluding SFA)
maintained for customers of the Company and has sold 100% of the
accounts receivable generated by these accounts to the Company's
special purpose entities, PCC and YCC. PCC and YCC, in turn, will
continue to sell these accounts receivable to PCCMT and YMT. The
Bank is expected to become the issuer of SFA credit cards in the
fourth quarter of 1998.
Operating Lease Agreement
In June 1997, SFA entered into a $100.5 million operating lease
agreement, which can be used to finance qualified properties placed
in service by December 31, 1999. Under this agreement, the lessor
has agreed to acquire and construct new store sites in order to
lease them to SFA. The lease requires a variable rent payment
related to LIBOR interest rates and SFA has guaranteed a
substantial residual value of the properties under lease. SFA has
guaranteed approximately $19 million at January 31, 1998. At
January 31, 1998, there was approximately $77.5 million available
under this lease agreement to fund capital expenditures. On
September 17, 1998, the Company terminated the operating lease
agreement which resulted in the purchase of properties valued at
approximately $30 million.
Capital Structure
During 1997, the Company implemented a comprehensive capital
structure strategy designed to reduce the Company's level of
secured indebtedness, to create a more appropriate fixed to
floating interest rate balance, and to lengthen the duration of
debt capital. The Company also enhanced the overall liquidity,
terms of availability, and pricing of financing arrangements. In
January and February of 1997 the Company reacquired $30 million of
outstanding REMIC certificates. In May 1997, the Company issued
$125 million of 8.125% Senior Unsecured Notes due 2004 ("Senior
Notes"), which were primarily used to repay $64 million of mortgage
debt and reduce borrowings under the Company's revolving credit
facility. Also in May, the Company repurchased $28.4 million of
9-7/8% Parisian Senior Subordinated Notes due 2003 ("Parisian Notes")
and in January 1998, the Company retired approximately $85 million
of the $97 million of remaining Parisian Notes through a cash
tender offer. In October 1997, the Company called its $86.3 million
4-3/4% Convertible Subordinated Debentures, which were converted
into approximately 4.0 million shares of Company Common Stock. In
January 1998, Proffitt's prepaid approximately $15 million of its
11% Junior Subordinated Notes, which were originally issued in
conjunction with the 1994 McRae's acquisition.
In June 1997, the Company amended its unsecured revolving
credit facility, raising the capacity to $400 million from $275
million, extending the maturity from three years to five, and
obtaining more favorable pricing. The maximum amount outstanding
under the Company's revolving credit facility during 1997 was
$210.0 million. At that time, the Company had unused availability
on its facility of $92.8 million.
In conjunction with the Carson's transaction, the Company
replaced its $400 million unsecured revolving credit facility and
Carson's $150 million unsecured working capital facility with a
$600 million unsecured revolving credit facility ("New Revolver"),
again obtaining more favorable pricing and providing the Company
with more flexibility under operating covenants. The New Revolver
is with several banks and expires in 2003. The pricing on the New
Revolver is a LIBOR- based rate. As of March 19, 1998, the
LIBOR-based interest rate on the New Revolver was approximately 6.1%. As
of March 19, 1998, the Company had borrowings totaling $100.2
million outstanding under the New Revolver and unused availability
of $484.3 million.
As of January 31, 1998, long-term debt consisted of $346.8
million outstanding on the Company's revolving credit facilities,
$125 million outstanding on Carson's $200 million receivables
facility, $340.7 million of REMIC certificates and mortgage debt,
$125 million of Senior Notes, $276 million of SFA convertible
debentures, $11 million of Parisian Notes, and $169.4 million of
capital lease obligations. At January 31, 1998, total debt was 42%
of total book capitalization, down from 50% at February 1, 1997. On
February 2, 1998, Carson's, Boston Store, and Bergner's proprietary
credit card receivables of approximately $270 million were sold to
PCC (refer to previous discussion). PCC, in turn, transferred these
receivables to PCCMT and received proceeds of $235 million which
were used to repay $125 million outstanding under the Carson's
receivables facility (which was then terminated), with the balance
applied to the New Revolver balance. After giving effect to these
transactions, total debt declined to 37% of capitalization at that
date.
In connection with the SFA merger, the Company initiated a
series of refinancing activities designed to reduce the weighted
average cost of debt, provide appropriate debt maturities, increase
the overall liquidity and ensure a proper capital structure. The
refinancing activities included: (1) on September 9, 1998 the
Company completed a tender offer for the $125 million 8.125% senior
unsecured notes utilizing proceeds from the revolving credit
agreements; (2) during September 1998 SFA repurchased $65 million
of outstanding REMIC mortgage certificates using proceeds from the
SFA revolving credit agreement, (3) on September 17, 1998 the
Company replaced the existing revolving credit agreements with a
new $1.5 billion revolving credit agreement (the New Facility)
which is unsecured, is scheduled to expire in September 2003, and
will bear interest at LIBOR based variable rates (the rate on
September 17, 1998 approximated 6%) and, (4) on September 17, 1998
advances from the New Facility were used to repay all outstanding
indebtedness under the SFA credit facility and the SFA credit
facility was terminated.
The SFA convertible debentures contain certain restrictive
covenants including the extension of a put option in the event of
a change in control of SFA. The Company believes that the merger
with SFA may constitute a change in control as defined in the
debenture and therefore the holders of the convertible debentures
would have a put option back to the Company. The Company's
interpretation of the debenture is that any convertible notes which
are put to the Company may be redeemed at the Company's option in
the form of cash or common stock of the Company. If the holders
exercise the put option, the Company may use proceeds from the New
Facility to fund the redemption and then may subsequently seek
replacement long-term financing.
Capital Needs
The Company estimates capital expenditures for 1998 will
approximate $400 million, primarily for the construction of new
store openings in 1998, initial construction work on stores
expected to open in 1999, several store expansions and renovations,
enhancements to management information systems, and regular
maintenance expenditures.
The Company anticipates its capital expenditures and working
capital requirements relating to planned new and existing stores
will be funded through cash provided by operations, ongoing sales
of receivables under the securitization programs and additional
borrowings. The Company expects to generate adequate cash flows
from operating activities to sustain current levels of operations.
The Company maintains favorable banking relations and anticipates
the necessary credit agreements will be extended or new agreements
will be entered into in order to provide future borrowing
requirements as needed. The Company also believes it has access to
a variety of other capital markets.
Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board (the
"FASB") issued Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings Per Share." The new standard changed the
presentation and method in which earnings per share are computed
and was effective for the Company's year ended January 31, 1998.
The Company has restated all per share amounts consistent with SFAS
No. 128.
In June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for the
reporting and display of comprehensive income and its components in
a full set of general-purpose financial statements. Also in June
1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." SFAS No. 131 requires
public business enterprises to report selected information about
operating segments as well as establishes standards for related
disclosures about products and services, geographic areas, and
major customers. In February 1998, the FASB issued SFAS No. 132
"Employers' Disclosures About Pensions And Other Postretirement
Benefits." SFAS No. 132 standardizes the disclosure requirements
for pensions and other postretirement benefits, eliminates certain
disclosures, and requires additional information on changes in the
benefit obligations and fair values of plan assets. These standards
are effective for the Company's year ending January 30, 1999, and
the Company is currently in the process of ascertaining the impact
these new standards will have on its financial statements for 1998
and prior periods.
In June 1998 the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Pledging Activities." SFAS No. 133 is
effective for the Company in the first quarter of fiscal 2000, and
the Company is in the process of ascertaining the impact this new
standard will have on its financial statements.
Forward-Looking Information
This report contains "forward-looking" statements within the
meaning of the federal securities laws. The forward-looking
information and statements contained throughout Management's
Discussion and Analysis are premised on many factors, some of which
are outlined below. Actual consolidated results might differ
materially from projected forward-looking information if there are
any material changes in management's assumptions.
The forward-looking information and statements are based on a
series of projections and estimates and involve certain risks and
uncertainties. Potential risks and uncertainties include such
factors as the level of consumer spending for apparel and other
merchandise carried by the Company, the competitive pricing
environment within the department and specialty store industries,
the effectiveness of planned advertising, marketing, and
promotional campaigns, appropriate inventory management,
realization of planned synergies, effective cost containment, and
solution of Year 2000 systems issues by the Company and its
suppliers.
When used in this report, words such as "believes,"
"estimates," "plans," "expects," "should," "may," "anticipates,"
and similar expressions as they relate to the Company or its
management are intended to identify forward-looking statements.
Supplemental Consolidated Statements of Income
(dollars in thousands, except per share amounts)
<TABLE>
Year Ended
---------------------------------
January 31, February 1, February 3,
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net sales $5,726,346 $4,926,862 $4,422,107
Cost of sales 3,731,293 3,208,989 2,900,026
--------- --------- ---------
Gross margin 1,995,053 1,717,873 1,522,081
Selling, general and
administrative expenses 1,165,118 1,057,144 961,407
Other operating expenses
Property and equipment
rentals 157,018 114,714 97,148
Depreciation and
amortization 136,119 123,533 121,171
Taxes other than income
taxes 134,121 117,355 110,137
Store pre-opening costs 17,018 11,645 2,178
Expenses related to attempted
Younkers takeover 10,017
(Gains) losses from
long-lived assets (134) 1,406 (36,058)
Merger, restructuring and
integration charges 36,524 16,929 64,237
Year 2000 expenses 6,590
ESOP expenses 9,513 3,910 2,931
-------- -------- --------
Operating income 333,166 271,237 188,913
Other income (expense)
Interest expense (113,685) (114,881) (141,725)
Other income (expense), net 2,330 (11,780) 4,051
-------- -------- ---------
Income before provision
for income taxes and
extraordinary items 221,811 144,576 51,239
Provision (benefit) for
income taxes (194,426) 50,998 48,914
-------- -------- --------
Income before extraordinary
items 416,237 93,578 2,325
Extraordinary loss on
early extinguishment of
debt, net of taxes 11,323 12,746 8,051
--------- -------- --------
Net income (loss) 404,914 80,832 (5,726)
Preferred stock payments 3,828 1,950
--------- -------- --------
Net income (loss) available
to common shareholders $404,914 $77,004 $(7,676)
========== ========= ========
Earnings per common share:
Basic earnings per
common share before
extraordinary loss $3.03 $0.72 $0.00
Extraordinary loss (0.09) (0.10) (0.07)
--------- --------- -------
Basic earnings (loss) per
common share $2.94 $0.62 $(0.07)
========= ========= =======
Diluted earnings per common
share before extraordinary
loss $2.86 $0.70 $0.00
Extraordinary loss (0.07) (0.10) (0.07)
--------- --------- --------
Diluted earnings (loss) per
common share $2.79 $0.60 $(0.07)
========= ======== =======
Weighted average common
shares
Basic 137,588 125,056 111,974
Diluted 149,085 132,583 113,309
</TABLE>
The accompanying notes are an integral part of these supplemental
consolidated financial statements.
Supplemental Consolidated Balance Sheets
(dollars in thousands)
<TABLE>
January 31, February 1,
1998 1997
---------- ----------
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 50,864 $ 76,955
Trade accounts receivable 412,209 395,028
Merchandise inventories 1,244,682 1,068,184
Other current assets 111,621 110,039
Deferred income taxes 71,814 16,305
--------- ---------
Total Current Assets 1,891,190 1,666,511
Property and Equipment,
net of depreciation 1,725,979 1,518,342
Goodwill and Intangibles,
net of amortization 327,307 367,889
Deferred Income Taxes 257,848
Other Assets 67,929 77,534
---------- ----------
Total Assets $4,270,253 $3,630,276
========== ==========
Liabilities and Shareholders' Equity
Current Liabilities
Trade accounts payable $333,794 $321,074
Accrued expenses 342,576 286,858
Accrued compensation and related items 69,286 52,576
Sales taxes payable 42,172 33,445
Current portion of long-term debt 13,058 20,806
---------- ---------
Total Current Liabilities 800,886 714,759
Senior Debt 1,093,806 863,475
Deferred Income Taxes 21,021
Other Long-Term Liabilities 144,068 131,320
Subordinated Debt 286,964 501,767
Commitments and Contingencies
Shareholders' Equity
Common stock 14,148 10,776
Additional paid-in capital 2,028,067 1,899,703
Accumulated deficit (97,686) (502,600)
Deferred ESOP compensation (9,778)
Unamortized stock compensation (167)
----------- ----------
Total Shareholders' Equity 1,944,529 1,397,934
----------- ----------
Total Liabilities and
Shareholders' Equity $4,270,253 $3,630,276
=========== ==========
</TABLE>
The accompanying notes are an integral part of these supplemental
consolidated financial statements.
Supplemental Consolidated Statements of Shareholders' Equity
(dollars in thousands)
<TABLE>
Additional Accum-
Preferred Common Paid-In ulated
Stock Stock Capital Deficit
--------- -------- ------- --------
<S> <C> <C> <C> <C>
Balance at January 28, 1995
As previously reported $28,850 $6,085 $441,971 $163,580
Adjustment for pooling of interests 3,690 918,526 (788,422)
---------- --------- --------- -----------
Balance at January 28, 1995 as restated 28,850 9,775 1,360,497 (624,842)
Net loss (5,726)
Issuance of common stock 36 6,241
Income tax benefits related to exercised
stock options 731
Purchases and retirements of stock (525) (58,286)
Increase in stock held in ESOP (15) (7,857)
Preferred stock dividends (1,950)
Decrease in tax valuation allowance 21,000
Benefit claims settlement 2,000
Unrealized gain on ESOP shares 45
Unrealized gain on investments 211
Stock compensation 56
Common stock dividends $.28 per
Herberger's share (1,046)
-------- -------- --------- ----------
Balance at February 3, 1996 28,850 9,271 1,332,495 (641,421)
Net income 80,832
Issuance of common stock 1,849 537,231
Income tax benefits related to exercised
stock options 4,633
Purchases and retirements of stock (776) (27,973) (7,060)
Sale of treasury stock 8,809
Reclassification of ESOP stock 290 (57) 69,907
Preferred stock dividends (796)
Decrease in tax valuation allowance 16,000
Unrealized gain on investment (498)
Stock compensation 278
Unrealized gain on ESOP shares 122
Conversion of preferred stock (28,850) 142 28,663 (3,032)
Common stock dividends,$.28 per
Herberger's share (1,030)
-------- -------- --------- ----------
Balance at February 1, 1997 10,776 1,899,703 (502,600)
Net income 404,914
Issuance of common stock 144 24,829
Income tax benefits related to exercised
stock options 7,319
2-for-1 stock split 3,070 (3,070)
Purchases and retirements of stock (53) (13,043)
Decrease in tax valuation allowance 16,000
Unrealized gain on investments 10
Stock compensation 9 1,451
Conversion of 4.75% subordinated debentures 202 86,082
Termination of ESOP 8,786
-------- -------- --------- ----------
Balance at January 31, 1998 $--- $14,148 $2,028,067 $(97,686)
======== ======== ========= ==========
Supplemental Consolidated Statements of Shareholders' Equity
(dollars in thousands)
(CONTINUED) Unamamort-
Deferred ized Total
ESOP Stock Stock-
Treasury Compen- Compen- holders'
Stock sation sation Equity
--------- -------- ------- --------
Balance at January 28, 1995
As previously reported $(33,639) $(748) $606,099
Adjustment for pooling of interests 133,794
--------- -------- ------- --------
Balance at January 28, 1995 as restated (33,639) (748) 739,893
Net loss (5,726)
Issuance of common stock 6,277
Income tax benefits related to exercised
stock options 731
Purchases and retirements of stock (4,044) (62,855)
Increase in stock held in ESOP (7,872)
Preferred stock dividends (1,950)
Decrease in tax valuation allowance 21,000
Benefit claims settlement 2,000
Unrealized gain on ESOP shares 45
Unrealized gain on investments 211
Stock compensation 295 351
Common stock dividends $.28 per
Herberger's share (1,046)
-------- -------- --------- ----------
Balance at February 3, 1996 (37,683) (453) 691,059)
Net income 80,832
Issuance of common stock 539,080
Income tax benefits related to exercised
stock options 4,633
Purchases and retirements of stock 21,481 (14,328)
Sale of treasury stock 16,202 25,011
Reclassification of ESOP stock $(9,778) 60,362
Preferred stock dividends (796)
Decrease in tax valuation allowance 16,000
Unrealized gain on investment (498)
Stock compensation 286 564
Unrealized gain on ESOP shares 122
Conversion of preferred stock (3,077)
Common stock dividends,$.28 per
Herberger's share (1,030)
-------- -------- --------- ----------
Balance at February 1, 1997 (9,778) (167) 1,397,934
Net income 404,914
Issuance of common stock 24,973
Income tax benefits related to exercised
stock options 7,319
2-for-1 stock split
Purchases and retirements of stock (13,096)
Decrease in tax valuation allowance 16,000
Unrealized gain on investments 10
Stock compensation 167 1,627
Conversion of 4.75% subordinated debentures 86,284
Termination of ESOP 9,778 18,564
-------- -------- --------- ----------
Balance at January 31, 1998 $--- $--- $--- $1,944,529
======== ======== ======== =========
</TABLE>
The accompanying notes are an integral part of these supplemental
consolidated financial statements.
Supplemental Consolidated Statements of Cash Flows
(dollars in thousands)
<TABLE>
Year Ended
------------------------------------
January 31, February 1, February 3,
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Operating Activities
Net income (loss) $404,914 $80,832 $(5,726)
Adjustments to reconcile
net income (loss) to net
cash provided by operating
activities:
Extraordinary loss on
extinguishment of debt 8,356 12,746 9,424
Depreciation and
amortization 136,119 123,533 121,171
Recognition of NOL
carryforwards (283,675)
Deferred income taxes 23,050 31,628 17,960
(Gains) losses from
long-lived assets (134) 1,406 (36,058)
Loss on County Seat
debentures 10,525
ESOP expenses 8,786 1,481 1,363
Restructuring items (800) 885 24,922
Changes in operating assets
and liabilities:
Trade accounts receivable (18,327) (38,706) 40,029
Merchandise inventories (175,912) (90,829) (69,956)
Other current assets 27,704 (13,533) (741)
Accounts payable and
accrued liabilities 99,352 18,831 59,258
Other operating assets
and liabilities (20,128) 1,896 (21,801)
---------- --------- ---------
Net Cash Provided By
Operating Activities 209,305 140,695 139,845
---------- --------- ---------
Investing Activities
Purchases of property
and equipment, net (346,876) (247,814) (172,662)
Proceeds from sale and
sale-leaseback of assets 27,851 36,282 83,607
Proceeds from sale of
marketable securities 5,653
Proceeds from sale of
subordinated certificates 13,427
Acquisition of Parisian
(1996)/Parks-Belk (1995) (119,070) (10,483)
----------- ----------- ----------
Net Cash Used In Investing
Activities (319,025) (330,602) (80,458)
----------- ----------- ----------
Financing Activities
Proceeds from long-term
borrowings 175,546 380,837 154,002
Payments on long-term
debt and capital lease
obligations (228,802) (390,097) (46,922)
Net borrowings (repayments)
under credit and
receivables facilities 148,142 (237,457) (55,887)
Proceeds from issuance of
stock and sale of
treasury stock 23,185 457,532 2,602
(Payment) proceeds of
REMIC certificates (30,000) (4,159) 311,207
Payment of Euronotes (335,000)
Redemption of subordinated
notes (57,000)
Purchase of treasury
stock (13,096) (14,383) (5,874)
ESOP loan repayment 9,778
Payments to preferred
and common shareholders (1,124) (4,858) (3,139)
Other (742) (629)
---------- ---------- ----------
Net Cash Provided By (Used
In) Financing Activities 83,629 186,673 (36,640)
---------- ---------- ----------
Increase (Decrease) In
Cash and Cash Equivalents (26,091) (3,234) 22,747
Cash and cash equivalents at
beginning of year 76,955 80,189 57,442
---------- ---------- ----------
Cash and cash equivalents at
end of year $50,864 $76,955 $80,189
========== ========== ==========
</TABLE>
Noncash investing and financing activities are further described in
the accompanying notes.
The accompanying notes are an integral part of these supplemental
consolidated financial statements.
1 Basis of Presentation
On September 17, 1998, Saks Holdings, Inc. ("SFA") merged with and
into a wholly owned subsidiary of Proffitt's, Inc. SFA is the
holding company of Saks & Company which does business as Saks Fifth
Avenue, Off 5th and Folio. The merger provided for the exchange of
each outstanding share of SFA Common Stock for .82 shares of
Proffitt's, Inc. common stock. In connection with the merger,
Proffitt's, Inc. changed the corporate name of Proffitt's, Inc. to
Saks Incorporated.
Saks Incorporated (formerly Proffitt's, Inc.) (the "Company"), is
a national retailer principally operating premier and traditional
department stores under the following names: Saks Fifth Avenue, Off
5th, Folio, Proffitt's, McRae's, Younkers, Parisian, Herberger's,
Carson Pirie Scott ("CPS"), Bergner's and Boston Store.
These supplemental consolidated financial statements include the
accounts of the Company and all of its subsidiaries and have been
prepared to give retroactive effect to the merger with SFA, which
was accounted for as a pooling-of-interests. Generally accepted
accounting principles proscribe giving effect to a completed merger
accounted for by the pooling-of-interests method in financial
statements that do not include the effective date of the merger.
These financial statements do not extend through the effective date
of the merger; however, they will become the historical
consolidated financial statements of the Company after financial
statements covering the effective date of the merger are issued.
The supplemental consolidated financial statements for 1996 and
1995 have also been previously restated to give retroactive effect
to the poolings-of-interests mergers in the respective year (See
Note 3). All significant intercompany balances and transactions
have been eliminated in consolidation.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets, liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. The recognition of net operating loss carryforwards also
reflects management's estimates of future taxable income. Actual
results could differ from these estimates.
2 Summary of Significant Accounting Policies
Fiscal Year
The Company's fiscal year ends on the Saturday closest to January
31. Fiscal years 1997 and 1996 contain 52 weeks and ended on
January 31, 1998 and February 1, 1997, respectively. Fiscal 1995
contains 53 weeks and ended on February 3, 1996.
Net Sales
Net sales include sales of merchandise and services and sales of
leased departments, net of returns and exclusive of sales tax.
Retail sales are recorded on the accrual basis and profits on
installment sales are recognized in full when the sales are
recorded. Sales of leased departments were $255,365 in 1997,
$234,902 in 1996, and $234,244 in 1995.
Cash and Cash Equivalents
Cash and cash equivalents consist of deposits with banks and
financial institutions that have maturities, when purchased, of
three months or less. Cash equivalents are stated at cost which
approximates fair value. Cash of approximately $13,012 and $10,805
has been restricted by the accounts receivable securitization
agreements at January 31, 1998 and February 1, 1997, respectively.
Accounts Receivable and Bad Debts
The Company provides credit to and performs ongoing credit
evaluations of its customers. Concentration of credit risk is
limited because of the large number of customers and their
dispersion throughout the United States and other countries.
Accounts receivable represents an owned residual interest in
revolving charge accounts held by the Company's special purpose
subsidiaries and related trusts and a direct ownership of revolving
charge accounts. In some cases, the account's terms provide for
payments exceeding one year. In accordance with usual industry
practice, such receivables are included in current assets.
The carrying amount of the residual interests retained, comprised
of servicing rights and certain net cash flows (projected finance
charge income net of credit losses and interest retained by the
purchasers of the receivables and securitization costs), is
recorded at their fair values.
The Company maintains an allowance for potential credit losses on
receivables repurchased from the special purpose subsidiary trusts.
Implicit in the residual interest retained is an allowance for
credit losses to be realized under the recourse provisions of sold
receivables. The aggregate activity in these two allowance accounts
is summarized as follows:
<TABLE>
Year Ended
--------------------------------------
January 31, February 1, February 3,
1998 1997 1996
--------- ---------- ---------
<S> <C> <C> <C>
Allowance at beginning
of period $32,595 $27,243 $22,822
Bad debt provision 60,514 45,183 43,633
Allowance related to
purchased receivables
and purchase of Parisian 4,058
Write-offs, net of
recoveries (59,866) (43,889) (39,212)
-------- -------- ---------
Allowances at end of period $33,243 $32,595 $27,243
======== ======== =========
</TABLE>
Merchandise Inventories
Merchandise inventories are stated at the lower of cost or market
as determined by the retail method and include freight and certain
purchasing and distribution costs. Substantially all of the
Company's inventory, excluding inventory owned by SFA, was
determined using the retail last-in, first-out (LIFO) cost. At
January 31, 1998, the retail LIFO value of inventory exceeded
market value, and as a result, inventory was stated at the lower
market amount. At February 1, 1997, the retail LIFO value of
inventory approximated the retail method value. At January 31, 1998
and February 1, 1997, the supplemental consolidated balance sheet
includes SFA inventory of $529,535 and $424,774, respectively.
Consignment merchandise on hand of $103,759 and $72,684 at
January 31, 1998 and February 1, 1997, respectively, is not
reflected in the supplemental consolidated balance sheets.
Advertising
Direct response advertising relates primarily to the production and
distribution of the Company's catalogs and is amortized over the
estimated life of the catalog. All other advertising and sales
promotion costs are expensed in the period incurred. Advertising
expenses were $192,154, $166,927 and $148,875 in fiscal years 1997,
1996 and 1995, respectively. Direct response advertising amounts
included in other current assets in the supplemental consolidated
balance sheets at January 31, 1998 and February 1, 1997, were
$5,145 and $3,837, respectively.
Store Pre-Opening Costs
Store pre-opening costs are expensed when incurred.
Property and Equipment
Property and equipment are stated at cost. For financial reporting
purposes, depreciation is computed principally using the
straight-line method over the estimated useful lives of the assets. Gains
or losses on the sale of assets are recorded at disposal.
Internally developed and purchased computer software is capitalized
and amortized using the straight-line method over 5 to 15 years.
The carrying value of property and equipment is periodically
reviewed and adjusted appropriately by the Company whenever events
or changes in circumstances indicate that the estimated fair value
is less than the carrying amount.
Goodwill and Intangibles
The Company has allocated the cost in excess of fair value of net
tangible assets acquired in purchase transactions to goodwill and
certain intangible assets, which are being amortized on a
straight-line method over 15 to 40 years. In fiscal 1997, the Company
recorded a net reduction of goodwill of $34,525 due to the
recognition of the tax benefit generated from differences for
financial statement purposes and income tax regulations in the
recording of various assets and liabilities at acquisition. The
Company recognized amortization expenses of $10,064, $6,075 and
$4,228 in fiscal years 1997, 1996 and 1995, respectively. As of
January 31, 1998 and February 1, 1997, the accumulated amortization
of goodwill and intangible assets was $26,500 and $24,286,
respectively.
At each balance sheet date, the Company evaluates the
recoverability of goodwill and intangible assets based upon
utilization of the assets and expectations of related cash flows.
Based upon its most recent analysis, the Company believes that no
impairment of goodwill and intangible assets exists at January 31,
1998.
Derivatives Policy
The Company uses financial derivatives only to reduce risk in
conjunction with specific business transactions.
The Company has purchased forward rate lock agreements and
interest rate cap agreements to limit its exposure to adverse
movements in interest rates related to planned debt issuances and
floating rate debt costs associated with its various financing
activities and accounts receivable securitization. In addition,
the Company entered into interest rate swap agreements to fix a
portion of the floating rate cost exposure related to the accounts
receivable securitization. The financial institutions associated
with these agreements are considered to be major, well-known
institutions. The premiums paid were capitalized and are being
amortized over the term of the related agreements.
Employee Stock Ownership Plans
Shares acquired after January 30, 1994 are accounted for in
accordance with Statement of Position ("SOP") 93-6, "Employers'
Accounting for Employee Stock Ownership Plans." All other
unreleased shares are accounted for in accordance with SOP 76-3,
"Accounting Practices for Certain Employee Stock Ownership Plans."
See Note 14 for discussion of the Herberger's Employee Stock
Ownership Plan ("ESOP") termination during 1997.
Stock-Based Compensation
The Company records compensation expense for all stock-based
compensation plans using the intrinsic value. Compensation
expense, if any, is measured as the excess of the market price of
the stock over the exercise price on the measurement date. Pro
forma disclosures of net income and earnings per share are
presented in Note 14, as if the fair value method had been applied.
Income Taxes
The company uses the asset and liability method of accounting for
income taxes. Under this method, deferred tax assets and
liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities, and are measured
using the enacted tax rates and laws that will be in effect when
the differences are expected to reverse.
Earnings Per Common Share
Basic earnings per common share (EPS) have been computed based on
the weighted average number of common shares outstanding, after
recognition of preferred stock payments of $3,828 and $1,950 for
1996 and 1995, respectively.
The Company's 4.75% and 5.5% convertible subordinated
debentures were considered in diluted earnings per share, when
dilutive. During 1997, the Company converted $86,250 of 4.75%
convertible subordinated debentures into 4,040 shares of common
stock.
Common stock issued upon the conversion of the preferred stock
in 1996 and the convertible subordinated debentures in 1997 have
been included in the weighted average number of shares outstanding
subsequent to the date of conversion for computing basic earnings
per share.
Computation of Per Share Earnings
<TABLE>
For the Year Ended
January 31, 1998
--------------------------------
Per
Share
Income Shares Amount
-------- -------- --------
<S> <C> <C> <C>
Basic EPS
Income before extra-
ordinary loss $ 416,237 137,588 $ 3.03
Effect of Dilutive Securities
Stock Options 3,438
Convertible subordinated
debentures 10,664 8,059
-------- -------- ---------
Diluted EPS
Income before extraordinary
loss available to common
shareholders plus
assumed conversions $ 426,901 149,085 $ 2.86
======= ======== ========
For the Year Ended
February 1, 1997
--------------------------------
Per
Share
Income Shares Amount
-------- -------- --------
Basic EPS
Income before extra-
ordinary loss $ 89,750 125,056 $ 0.72
Effect of Dilutive Securities
Stock Options 3,487
Convertible subordinated
debentures 2,500 4,040
-------- -------- ---------
Diluted EPS
Income before extraordinary
loss available to common
shareholders plus
assumed conversions $ 92,250 132,583 $ 0.70
======= ======== ========
For the Year Ended
February 3, 1996
--------------------------------
Per
Share
Income Shares Amount
-------- -------- --------
Basic EPS
Income before extra-
ordinary loss $ 375 111,974 $ 0.00
Effect of Dilutive Securities
Stock Options 1,335
Convertible subordinated
debentures
-------- -------- ---------
Diluted EPS
Income before extraordinary
loss available to common
shareholders plus
assumed conversions $ 375 113,309 $ 0.00
======= ======== ========
</TABLE>
New Accounting Pronouncements
In February 1997, the FASB issued SFAS No. 128, "Earnings Per
Share." The new standard changed the presentation and method in
which earnings per share are computed. The Company restated all per
share amounts consistent with the new accounting pronouncement.
In June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income" and SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information." SFAS 130 establishes
standards for the reporting and display of comprehensive income and
its components in a full set of general-purpose financial
statements. SFAS 131 requires public business enterprises to report
selected information about operating segments as well as
establishes standards for related disclosures about products and
services, geographic areas, and major customers. In February 1998,
the FASB issued SFAS No. 132, "Employers' Disclosures About
Pensions and Other Postretirement Benefits". SFAS 132 standardizes
the disclosure requirements for pensions and other postretirement
benefits, eliminates certain disclosures, and requires additional
information on changes in the benefit obligations and fair values
of plan assets. These standards are effective for the Company's
year ending January 30, 1999 and the Company is currently in the
process of ascertaining the impact the new standards will have on
its financial statements for 1998 and prior periods.
3 Mergers and Acquisitions
The company has experienced significant growth since 1994,
primarily through a series of acquisitions. The Company's
significant acquisitions are outlined below:
<TABLE>
Acquired Date Accounting Shares Purchase
Company Acquired Treatment Issued Price
-------- --------- -------- ------ --------
<S> <C> <S> <C> <C>
McRae's 3/31/94 Purchase 872 $ 256,000
Younkers 2/3/96 Pooling 17,632
Parisian 10/11/96 Purchase 5,894 $ 517,000
Herberger's 2/1/97 Pooling 8,000
Carson Pirie Scott 1/31/98 Pooling 27,565
Saks Holdings 9/17/98 Pooling 52,500
</TABLE>
Separate results of the combined entities for the two most recent
pooling transactions were as follows:
Year Ended
--------------------------------
January 31, February 1, February 3,
1998 1997 1996
---------- ---------- ---------
Revenue:
Proffitt's $2,374,654 $1,889,779 $1,661,056
CPS 1,170,002 1,102,827 1,083,812
SFA 2,181,690 1,934,256 1,677,239
----------- ----------- -----------
$5,726,346 $4,926,862 $4,422,107
=========== =========== ===========
Extraordinary item:
Proffitt's $(8,254) $ (2,060)
CPS (1,091)
SFA (1,978) $(12,746) (5,991)
----------- ----------- -----------
$(11,323) $(12,746) $(8,051)
=========== =========== ===========
Net income (loss):
Proffitt's $49,025 $37,399 $(1,419)
CPS 13,712 29,681 64,301
SFA 342,177 13,752 (68,608)
----------- ----------- -----------
$404,914 $80,832 $(5,726)
=========== =========== ===========
SFA's and CPS's financial statements have been restated to conform
to the Company's accounting methods and financial statement
presentation which included changing SFA's and CPS's previously
reported income and shareholders' equity, the most significant
changes included:
* CPS Prior to the mergers of Proffitt's, Inc. with
Younkers, Inc. ("Younkers") and Proffitt's, Inc. with
CPS, CPS owned shares of Younkers common stock. CPS
recorded an unrealized gain of $6,940 before income taxes
of $2,776 at February 3, 1996. During 1996, CPS sold the
shares for $31,094 and realized a gain of $14,892. The
unrealized gain, the realized gain and the related income
tax effect, which had been reflected in previous CPS
financial statements, have been eliminated in the
preparation of these financial statements.
* SFA SFA previously included certain store receiving
costs in inventory, accrued certain estimated vendor
rebates as receivables and deferred store preopening
costs. The effect of the conformity restatement is to
reduce previously reported net income by $1,627 in 1997,
$10,392 in 1996 and $4,513 in 1995.
Additionally the Company has changed its presentation of
finance charge income to include such as a component of selling,
general and administrative expenses with no impact on previously
reported net income.
4 Pending Acquisition
In August 1998, the Company entered into an agreement with
Dillard's, Inc. ("Dillards") in which the Company expects to
acquire 15 store locations along with certain inventory and
accounts receivable that are currently owned by Dillards. The
transaction is expected to have a value in excess of $400 million
and to be completed by the end of October 1998.
5 Marketable Securities
Investments in marketable securities are carried as available-for-
sale securities at fair value. Unrealized holding gains and losses,
net of the related tax effect, are excluded from income and are
reported as a component of shareholders' equity until realized.
CPS held $23,353 par value of 9% Junior Subordinated Exchange
Debentures Due 2004 of County Seat Holdings, Inc. In 1996, CPS
wrote down its entire interest in the County Seat Debentures and
reflected such in other income (expense). In 1997, CPS sold its
County Seat Debentures for an insignificant amount.
6 Accounts Receivable Securitization
The Company has entered into agreements to securitize a majority
of its proprietary credit card receivables. The securitization of
receivables involves the transfer of receivables with limited
recourse from the Company's wholly owned special purpose
subsidiaries' trusts: Saks Finance Company, ("SFC") Proffitt's
Credit Corporation ("PCC") and Younkers Credit Corporation ("YCC")
in exchange for cash and subordinated certificates representing
undivided interests in the pool of receivables, and the subsequent
sale by the trusts of certificates of beneficial interest, also
representing undivided interests in the pool of receivables, to
investors.
The Company has the ability to sell securities in fixed or
variable denominations with fixed or variable implicit discount
rates. At January 31, 1998, the Company had available the following
funding sources:
Average
Amount Implicit
Outstanding Discount Expiration
Entity Funding Capacity 1/31/98 Rate Date
------ -------------- -------- ------- -------
SFC Fixed at $413,000 $ 413,000 Variable April 1999
SFC Variable up to 34,281 Variable April 1999
$118,000
YCC Fixed at $75,000 75,000 6.45% June 2000
YCC Variable up to 6,000 Variable July 2000
$50,000
PCC Fixed at $200,000 200,000 6.50% August 2002
PCC Variable up to 114,113 Variable August 2002
$150,000
----------
$ 842,394
SFC's funding arrangements bear interest at fixed spreads over the
one-month LIBOR. The YCC and PCC variable arrangements are
discounted based on commercial paper rates. At January 31, 1998,
the weighted average variable rate for the PCC and YCC facilities
was 6.1%. The various agreements contain covenants requiring the
maintenance of certain financial ratios and receivables portfolio
performance measures. While the Company has no obligation to
reimburse the trust or investors for credit losses, the Company is
obligated to repurchase receivables related to customer credits
such as merchandise returns and other receivables defects.
Finance charges earned by the purchasers were $53,530, $34,045
and $24,042 for 1997, 1996 and 1995, respectively. Net finance
charge income included in selling, general and administrative
expenses in the supplemental consolidated statements of income
totaled $151,199 in 1997, $130,178 in 1996 and $123,493 in 1995.
The ownership interest transferred by PCC, YCC, and SFC to the
purchasers was $842,394 and $752,408 at January 31, 1998 and
February 1, 1997, respectively.
Effective for 1998, the National Bank of the Great Lakes
("NBGL"), a wholly-owned national credit card bank subsidiary, will
issue all credit cards (with the exception of SFA credit cards) and
sell all accounts receivable generated by the credit cards to PCC
and YCC. To accommodate the increase in accounts receivable
attributable to the CPS stores, the PCC variable funding facility
was increased to $400,000 subsequent to January 31, 1998. The Bank
is expected to become the issuer of SFA credit cards in the fourth
quarter of 1998.
7 Property and Equipment
A summary of property and equipment is as follows:
January 31, February 1,
1998 1997
---------- ---------
Land and land improvements $260,862 $256,328
Buildings 955,981 800,335
Leasehold improvements 155,643 185,416
Fixtures and equipment 823,769 634,434
Construction in progress 55,361 57,681
--------- ----------
2,251,616 1,934,194
Accumulated depreciation (544,637) (449,199)
--------- ----------
1,706,979 1,484,995
Property held for sale, net of
accumulated depreciation 19,000 33,347
--------- ----------
$1,725,979 $1,518,342
=========== ===========
In 1995, the Company sold eight CPS stores located in
Minnesota (the "Minnesota Closed Stores") for net proceeds of
$70,801. The assets sold had a carrying cost of $9,521. The Company
separately liquidated all inventory, fixtures and accounts
receivable related to the Minnesota Closed Stores. The Company
recorded a gain on the sale of its Minnesota Closed Stores of
$55,179, after closing costs, for the year ended February 3, 1996,
which is included in (gains) losses from long-lived assets in the
supplemental consolidated statements of income.
In 1995, the Company decided to exit the SFA Yonkers, New York
distribution center effective in early 1997 and relocate
distribution activities to a facility in Hickory Ridge, Maryland.
As a result of this decision, the Company recorded $19,015 of
special charges in 1995. Such charges included the write-down of
the Yonkers distribution center to its net realizable value, as
well as certain severance and occupancy costs. The Company has
entered into an agreement to sell the former distribution facility
which is subject to successful rezoning of the property.
8 Income Taxes
The components of income tax expense (benefit) are as follows:
Year Ended
--------------------------------
January 31, February 1, February 3,
1998 1997 1996
---------- ---------- ---------
Current:
Federal $51,562 $14,522 $23,898
State 8,845 4,848 5,683
-------- -------- --------
60,407 19,370 29,581
Deferred:
Federal (239,396) 27,572 15,046
State (22,599) 4,056 2,914
-------- -------- --------
(261,995) 31,628 17,960
-------- -------- --------
Total expense (benefit) $(201,588) $50,998 $47,541
-------- -------- --------
The tax effect for extraordinary losses on early
extinguishment of debt was $7,162, $0 and $1,373 for fiscal years
1997, 1996 and 1995, respectively.
Components of the net deferred tax asset or liability
recognized in the consolidated balance sheets are as follows:
January 31, February 1,
1998 1997
---------- ---------
Current:
Deferred tax assets:
Trade accounts receivable $8,550 $12,377
Accrued expenses 38,925 41,953
AMT Credit 704 0
NOL carryorwards 44,128 46,685
Valuation allowance (6,155) (71,840)
--------- ---------
86,152 29,175
Deferred tax liabilities:
Inventory (13,126) (11,365)
Other (1,212) (1,505)
--------- ---------
(14,338) (12,870)
--------- ---------
Net current deferred tax asset $71,814 $16,305
========= =========
Noncurrent:
Deferred tax assets
Capital leases $16,650 $16,635
Other long-term liabilities 63,420 55,561
Deferred compensation 1,908 2,195
NOL carryforwards 280,834 300,599
Valuation allowance (41,251) (339,177)
--------- ---------
321,561 35,813
Deferred tax liabilities:
Property and equipment (39,142) (30,588)
Deferred gain (6,491) (6,620)
Other assets (18,080) (18,421)
Junior subordinated debentures (1,205)
--------- ---------
(63,713) (56,834)
Net non-current deferred tax asset
(liability) $257,848 $(21,021)
========= =========
At January 31, 1998, the Company has $716,433 and $116,800 in
federal and state tax net operating loss carryforwards related to
losses incurred by SFA and CPS. The carryforwards will expire
between 2003 and 2011. The future utilization of these
carryforwards is restricted under federal income tax change-in-
ownership rules and SFA's and CPS's ability to generate sufficient
taxable income.
The continued improvement in SFA's operating income in fiscal
1997, as well as SFA's estimate of future profitability, enabled
the Company to recognize a $294,846 deferred tax asset in the
fourth quarter of 1997. The benefit reflects the elimination of
the valuation allowance relating to the tax benefit of SFA's net
operating loss carryforwards. The realization of this tax benefit
also enabled SFA to reduce goodwill by $34,525 due to SFA recording
certain assets and liabilities at their date of acquisition for
financial reporting purposes which were not recognized for income
tax purposes.
The valuation allowance attributable to CPS losses and tax
basis differences was reduced by $16,000 for each of the years
ended January 31, 1998 and February 1, 1997, based on management's
reassessment of the realizability of the related deferred tax asset
in future years. The tax benefit resulting from the reduction in
the valuation allowance is credited directly to shareholders'
equity.
The Company believes it is more likely than not that the
benefit of the net deferred tax assets will be realized.
Income tax expense varies from the amount computed by applying
the statutory federal income tax rate to income before taxes. The
reasons for this difference are as follows: (the following
reconciliation excludes the impact of eliminating SFA's $294,846
valuation allowance in 1997).
1997 1996 1995
------ ------- -------
Statutory tax rate 35.0% 35.0% 35.0%
State income taxes, net of
federal benefit 3.5 4.4 9.2
Nondeductible merger related
costs 3.4 1.3 6.0
Amortization of goodwill 1.7 0.9 1.0
Generation (Recognition) of
NOL carryforward (8.0) 42.6
Non-deductible ESOP expenses 2.2 1.1 1.6
Other items, net 0.1
------ ------- -------
Effective tax rate 45.9% 34.7% 95.4%
====== ======= ======
The Company made income tax payments, net of refunds received, of
$12,664, $34,172 and $14,232 during 1997, 1996 and 1995,
respectively.
9 Senior Debt
A summary of senior debt is as follows:
January 31, February 1,
1998 1997
---------- -----------
SFA real estate financing
REMIC certificates $300,841 $315,841
Revolving credit agreements 346,750 154,437
CPS receivables facility, weighted
average interest rate of 5.58%
and 5.47%, respectively 125,000 113,511
Senior unsecured notes, 8.125%,
maturing 2004 125,000
Real estate notes, mortgage notes
and industrial revenue bonds 39,865 133,324
Capital lease obligations 169,408 167,168
---------- ----------
1,106,864 884,281
Current portion (13,058) (20,806)
---------- ----------
$1,093,806 $863,475
========== ==========
Real Estate Financing
In May 1995, SFA, through a subsidiary trust, completed a real
estate financing, aggregating $335,000 through the issuance of
mortgage loans collateralized by intercompany leases. Mortgage
certificates in the principal amount of $175,000 bear interest at
variable rates based on three-month LIBOR, payable quarterly. The
remaining $160,000 in certificates, which are subordinated to the
other certificates, bear interest at annual fixed rates ranging
from 8.98% to 12.36%, payable semiannually. All of the mortgage
certificates are scheduled to mature in May 2002. The debt related
to individual properties is prepayable at premiums ranging from
stated value to 150% of stated value. The various properties and
leases collateralizing the mortgage certificates are cross
guaranteed. The Company guarantees the obligations under all
intercompany leases. In conjunction with the May 1995 transaction,
the Company recorded an extraordinary charge related to the early
extinguishment of debt of $5,991.
In January 1996, the Company sold one of its stores and
prepaid the mortgage loan associated with this property,
aggregating $4,159. The proceeds were used to prepay the related
mortgage certificates with an annual fixed interest rate of 12.36%
in February 1996. In January 1997, the Company reacquired $15,000
of its outstanding certificates with an annual interest rate of
12.36%, effectively prepaying the mortgage certificates. The
Company recorded an extraordinary charge of $2,951 associated with
the repurchase premium and accelerated write-off of deferred
financing costs related to this repurchase. In February 1997, the
Company reacquired an additional $15,000 of its outstanding
certificates with an annual fixed interest rate of 12.36%. The
Company recorded an extraordinary charge of $3,352 associated with
the repurchase premium and accelerated write-off of deferred
financing costs related to this purchase.
The sale of the Yonkers, New York distribution center will
require the prepayment of mortgage certificates totaling $9,074.
Revolving Credit Facilities
In conjunction with the acquisition of CPS, the Company replaced
its revolving credit agreement and CPS's revolver with a new
$600,000 revolving credit facility (the "Credit Facility"). The
Credit Facility is scheduled to expire in February 2003. Advances
under the Credit Facility bear interest at variable rates and are
unsecured. At January 31, 1998, the interest rate was 6.5%. The
Credit Facility requires the Company to meet specific covenants
related to net worth, leverage, fixed charges, and indebtedness.
Previously unamortized debt issuance costs associated with the
replaced revolver were written off and reflected in the
extraordinary loss on early extinguishment of debt in 1997. Amounts
outstanding under this facility at January 31, 1998 was $210,000.
In October 1996, the Company amended and restated the SFA
credit facility. The revolving credit commitments were increased
to $350,000 and the maturity of the revolving credit commitments
was extended to October 30, 2001. Borrowings under the SFA credit
facility bear interest at variable rates and were $136,750 at
January 31, 1998. The borrowing availability is reduced by any
standby or commercial letters of credit. Total available credit
under the SFA credit agreement was $209,220 at January 31, 1998.
Prior to the merger with Proffitt's, CPS financed its trade
accounts receivable with a $200,000 facility ("Receivables
Facility"). In connection with the merger, the Receivables Facility
was terminated and the $125,000 outstanding balance under the
Receivables Facility was repaid on February 2, 1998, with proceeds
from the sale of receivables under the Company's receivables
securitization agreements (see Note 5).
Other Senior Debt
Proceeds from the 1997 sale of 8.125% senior unsecured notes were
used primarily to reduce subordinated debt, real estate notes and
mortgage notes. The notes contain several covenants including
limitations on indebtedness, transactions with affiliates, and
disposition of assets.
In May 1996, SFA completed an initial public offering with net
proceeds of $417,769. The proceeds from the offering were
primarily used to prepay term loan borrowings and outstanding
revolving credit balances under SFA's existing credit facility.
The Company recorded an extraordinary loss of $3,340 associated
with the accelerated write-off of deferred financing costs related
to these payments.
Effective with the February 3, 1996 Younkers merger, the
Company replaced Younkers' debt collateralized by its trade
accounts receivable with the sale of an undivided interest in its
accounts receivable and canceled its revolving credit facility. As
a result of this early extinguishment of debt, certain deferred
debt costs aggregating $3,433 were written off as an extraordinary
item in 1995.
Maturities
At January 31, 1998, maturities of senior debt for the next five
years and thereafter, giving consideration to lenders' call
privileges, are as follows:
Year Maturities
--------- ------------
1998 $13,058
1999 10,554
2000 133,001
2001 142,627
2002 535,464
Thereafter 272,160
---------
$1,106,864
==========
The Company made interest payments, net of capitalized interest, of
$97,745, $94,848 and $116,478 during 1997, 1996 and 1995,
respectively.
Refinancing Activities
In connection with the SFA merger, the Company initiated a series
of refinancing activities designed to reduce the weighted average
cost of debt, provide appropriate debt maturities, and attempt to
ensure adequate liquidity. The refinancing activities included:
(1) on September 9, 1998 the Company completed a tender offer for
its $125 million 8.125% senior unsecured notes utilizing proceeds
from revolving credit agreements, (2) during September 1998 SFA
repurchased $65 million of outstanding REMIC mortgage certificates
using proceeds from the SFA revolving credit agreement, (3) on
September 17, 1998 the Company replaced the existing revolving
credit agreements with a new $1.5 billion revolving credit
agreement (the "New Facility") which is unsecured, is scheduled to
expire in September 2003, and will bear interest at LIBOR based
variable rates (the rate on September 17, 1998 approximated 6.0%),
and (4) on September 17, 1998 advances from the New Facility were
used to repay all outstanding indebtedness under the SFA credit
facility and the SFA credit facility was terminated.
The SFA convertible debentures contain certain restrictive
covenants including the extension of a put option in the event of
a change in control of SFA. The Company believes that the merger
with SFA may constitute a change in control as defined in the
debenture and therefore the holders of the convertible debentures
would have a put option back to the Company. The Company's
interpretation of the debenture is that any convertible notes which
are put to the Company may be redeemed at the Company's option in
the form of cash or common stock of the Company. If the holders
exercise the put option, the Company may use proceeds from the New
Facility to fund the redemption and then may subsequently seek
replacement long-term financing.
10 Subordinated Debt
Subordinated debt represents uncollateralized obligations
subordinated in right of payment to all senior debt and is composed
of the following:
January 31, February 1,
1998 1997
--------- ---------
Convertible debentures, interest
at 5.5%, maturing September 2006 $ 276,000 $ 276,000
Convertible debentures, interest at
4.75%, maturing November 2003,
converted into 4,040 shares of
Proffitt's common stock in October
1997 86,250
Notes, interest at 9.875%, maturing
July 2003 10,964 125,000
Junior debentures, interest at 7.5%,
maturing March 2004, prepaid in
January 1998 14,517
--------- ---------
$ 286,964 $ 501,767
========== ==========
In September 1996, SFA issued $276,000 aggregate principal amount
of 5.5% convertible debentures for net cash proceeds after offering
expenses and financing costs of $267,500. The debentures are due
on September 15, 2006, and are convertible at any time prior to
maturity into shares of the Company's common stock at a conversion
rate of 19.73 shares of common stock for each one thousand dollar
principal amount of debentures, which is equivalent to a conversion
price of approximately $50.68 per share. If all of the debentures
are converted, a total of 5,446 shares of common stock will be
issued. The debentures are redeemable at the Company's option at
any time on or after September 15, 1999, at redemption rates
ranging from 100.55% to 103.85%.
The net proceeds from the issuance of the convertible
debentures were primarily used to prepay term loan borrowings and
subordinated notes and to repay outstanding balances on the
revolving credit facility. During 1996, the Company recorded an
extraordinary loss of $6,455 relating to the accelerated write-off
of deferred financing costs related to the prepayments.
In October 1997, the 4.75% convertible debentures were
converted into 4,040 shares of the Company's common stock. As a
result of this conversion, certain deferred debt issuance costs
aggregating $600 were written off as an extraordinary item.
Effective with the Parisian acquisition, the Company assumed
the existing Parisian 9.875% subordinated notes. The notes are
redeemable at the option of the Company, in whole or in part, after
July 15, 1998, 1999 and 2000 at approximately 105%, 102.5% and 100%
of face value, respectively. In May and June 1997, the Company
purchased approximately $28,400 of these notes which resulted in an
extraordinary loss from the extinguishment of debt of approximately
$1,800. In January 1998, the Company made a cash tender offer at
approximately 106% of face value for the remaining $96,600 of
outstanding notes. This tender offer was accepted by 89% of the
note holders, which left approximately $11,000 outstanding as of
January 31, 1998. The January tender resulted in an extraordinary
loss from the early extinguishment of debt of approximately
$11,000.
The 7.5% junior subordinated debentures were discounted at the
date of issue to reflect their fair value and were being accreted
to a face value of $17,500 with an effective interest rate of 11%.
In January 1998, the Company completed the prepayment of the junior
subordinated debentures for the face value, which resulted in an
extraordinary charge of $2,700.
11 Leases
The Company leases certain land and buildings under various
noncancelable capital and operating leases. The leases generally
provide for contingent rentals based upon sales in excess of stated
amounts and require the Company to pay real estate taxes, insurance
and occupancy costs. Generally, the leases have primary terms
ranging from 20 to 30 years and include renewal options ranging
from 5 to 20 years.
At January 31, 1998, future minimum rental commitments under
capital leases and noncancelable operating leases consisted of the
following:
Operating Leases Capital Leases
------------- ------------
1998 $117,618 $25,518
1999 119,902 25,760
2000 113,652 25,679
2001 101,136 24,008
2002 97,624 23,447
Thereafter 860,231 302,786
--------- ---------
$1,410,163 $427,198
Amount representing interest ========== (257,790)
---------
Capital lease obligations $ 169,408
=========
Total rental expense for operating leases was $150,715,
$109,882 and $92,043 during 1997, 1996 and 1995, respectively,
including contingent rents of approximately $20,733, $17,762 and
$13,942 respectively.
In June 1997, SFA entered into a $100,500 operating lease
agreement, which can be used to finance qualified properties placed
in service by December 31, 1999. Under the agreement, the lessor
agreed to construct new store sites in order to lease them to the
Company. The lease requires a variable rent payment principally
related to LIBOR interest rates. The Company has also guaranteed
a substantial residual value of the properties under lease. At
January 31, 1998, the Company has guaranteed approximately $18,869.
The Company may purchase the assets under lease or elect for the
properties to be sold to a third party. At January 31, 1998, there
was approximately $77,500 available under the agreement to fund
capital expenditures. The initial lease term ends in October 2001
and may be extended at the mutual consent of the lessor and the
Company. On September 17, 1998, the Company terminated the
operating lease agreement which resulted in the purchase of
properties valued at approximately $30 million.
The Company leases certain selling space within its stores to
other specialty retailers under contingent rental agreements.
Rental income related to these agreements was $13,024, $11,846, and
$10,209 in 1997, 1996 and 1995, respectively.
During 1997, 1996 and 1995, the Company consummated the sale
and sale-leaseback of certain property and equipment with proceeds
of $4,630, $30,269 and $12,806, respectively.
12 Employee Benefit Plans
Employee Savings Plans
The Company sponsors various profit sharing and savings plans that
cover substantially all full-time employees. Company contributions
charged to expense under these plans, or similar predecessor plans,
for 1997, 1996 and 1995 were $ 6,509, $ 5,133 and $ 5,190,
respectively.
SFA Defined Benefit Plan
The Company sponsors a noncontributory defined benefit pension plan
covering substantially all SFA full-time employees. Benefits are
based upon years of service and compensation prior to retirement.
SFA contributed $4,454 and $18,440 in 1997 and 1996, respectively,
and did not make any contributions in 1995. Pension plan assets
consist primarily of common stock funds, U.S. Government and
agencies obligations, corporate debt securities, money market funds
and real estate interests.
Net periodic pension expense consisted of the following:
Fiscal Year Ended
-------------------------------------
January 31, February 1, February 3,
1998 1997 1996
---------- ---------- ----------
Service cost $5,151 $4,729 $3,527
Interest cost 7,046 6,629 5,778
Return on assets (6,863) (5,587) (9,095)
Net amortization and deferral 2 2 4,906
--------- -------- -------
Net pension expense $5,336 $5,773 $5,116
======== ========= =======
The following table sets forth the SFA pension plan's funded status
and the present value of the benefit obligations:
January 31, February 1,
1998 1997
---------- ----------
Actuarial present value of
benefit obligation:
Vested benefit obligation $(93,748) $(79,876)
Nonvested benefit obligation (6,500) (4,636)
--------- ----------
Accumulated benefit obligation (100,248) (84,512)
Excess of projected benefit
obligation over accumulated
benefit obligation (6,973) (4,867)
--------- ----------
Projected benefit obligation (107,221) (89,379)
Plan assets at fair value 84,077 73,800
---------- ----------
Deficiency of plan assets over
projected benefit obligation (23,144) (15,579)
Unrecognized net loss (gain) 5,657 (1,027)
Unrecognized prior service cost 22 24
---------- ----------
Accrued pension cost classified
in other liabilities $(17,465) $(16,582)
========= ==========
Discount rate 7.25% 8.00%
Expected long-term rate of return
on assets 9.50% 9.50%
Average assumed rate of compensation
increase 3.00% 3.00%
The Company also maintains for SFA employees an unfunded
supplemental retirement plan which provides for benefits in
addition to those provided by the pension plan. Expenses related
to the supplemental plan were $934, $784 and $502 in 1997, 1996 and
1995, respectively. Payments from the supplemental plan were $233,
$233 and $279 during 1997, 1996 and 1995, respectively. The
accrued liability for this plan at January 31, 1998 and February 1,
1997, was $8,513 and $7,811, respectively, and is included in other
noncurrent liabilities in the accompanying consolidated balance
sheets.
CPS Defined Benefit Plans
CPS also sponsors a noncontributory defined benefit plan covering
substantially all employees who have attained a minimum age and
number of hours of employment. Approximately 64% of the pension
plan assets consist primarily of common stock funds and the
remainder of the plan assets are invested in bonds.
Net periodic pension expense consisted of the following:
Fiscal Year Ended
-------------------------------------
January 31, February 1, February 3,
1998 1997 1996
---------- ---------- ----------
Service cost $4,805 $5,326 $4,535
Interest cost 9,445 9,012 8,651
Return on assets (24,211) (17,144) (26,029)
Net amortization and
deferral 12,338 5,867 14,886
-------- --------- ---------
Net pension expense $2,377 $3,061 $2,043
======== ========= =========
The following table sets forth the CPS pension plan's funded status
and the present value of benefit obligations:
January 31, February 1,
1998 1997
---------- ----------
Actuarial present value of
benefit obligation:
Vested benefit obligation $(128,755) $(117,689)
Nonvested benefit obligation (3,173) (2,437)
---------- ----------
Accumulated benefit obligation (131,928) (120,126)
Excess of projected benefit
obligation over accumulated
benefit obligation (6,292) (5,489)
---------- ---------
Projected benefit obligation (138,220) (125,615)
Plan assets at fair value 146,345 131,076
---------- ----------
Excess of plan assets over
projected benefit obligation 8,125 5,461
Unrecognized net gain (11,990) (6,912)
Unrecognized prior service cost (196) (233)
---------- ---------
Accrued pension cost classified
in other liabilities $(4,061) $(1,684)
========== =========
Discount rate 7.50% 7.75%
Expected long-term rate of return
on assets 9.50% 9.25%
Average assumed rate of compensation
increase 4.50% 4.75%
The CPS defined benefit plan assets at January 31, 1998 and
February 1, 1997 were based on a respective November 1 measurement
date.
Retiree Health Care Plans
The Company provides health care benefits for certain groups of
employees who retired before 1997. The plans were contributory with
the Company providing a frozen annual credit of varying amounts per
year of service. A $2.9 million curtailment gain was recognized for
the year ended February 3, 1996. The annual expense is comprised
principally of interest cost and is less than $1,000 annually.
The liabilities for the unfunded plans reflected in the Company's
consolidated balance sheets are as follows:
January 31, February 1,
1998 1997
---------- ----------
Accumulated postretirement benfit obligation
Retirees $10,530 $9,619
Fully eligible active plan participants 1,031
-------- --------
10,530 10,650
Unrecognized gain 3,504 3,416
-------- --------
Accrued postretirement benefit
cost classified in other liabilities $14,034 $14,066
======== ========
13 Shareholders' Equity
Preferred Stock
On March 31, 1994, the Company issued 600 shares of series A
Cumulative Convertible Exchangeable Preferred Stock in a private
offering (10,000 total shares authorized). Net proceeds to the
Company were approximately $28,900 after offering expenses.
Dividends were cumulative and were paid at $3.25 per annum per
share. On June 28, 1996, the holder converted the preferred stock
into 2,844 shares of the Company's common stock. The Company paid
$3,032 to the holder of the preferred stock to induce early
conversion.
Common Stock
The Company has 500,000 shares (increased from 300,000 in September
1998) of $.10 par value common shares authorized of which 141,461
and 107,725 shares were issued and outstanding at January 31, 1998
and February 1, 1997, respectively.
In August 1997, the Company's Board of Directors approved a 2-for-1
stock split of the outstanding shares of the Company's common
stock. The split was effected in the form of a stock dividend; each
shareholder received one additional share for each outstanding
share of common stock held of record as of the close of business on
October 15, 1997. The per share amounts presented in the Company's
consolidated financial statements are reflective of the 2-for-1
stock split.
Each outstanding share of common stock has one preferred stock
purchase right attached. The rights (which were revised in June
1998) generally become exercisable ten days after an outside party
acquires, or makes an offer for, 20% or more of the common stock.
Each right entitles its holder to buy 1/200 share of Series C
Junior Preferred Stock at an exercise price of $278 per 1/100 of a
share, subject to adjustment in certain cases. The rights expire in
March 2008. Once exercisable, if the Company is involved in a
merger or other business combination or an outside party acquires
20% or more of the common stock, each right will be modified to
entitle its holder (other than the acquirer) to purchase common
stock of the acquiring company or, in certain circumstances, common
stock having a market value of twice the exercise price of the
right.
Treasury Stock
Previously, Herberger's was required to repurchase shares from
inactive participants of its ESOP at fair value. Treasury stock
transactions were accounted for under the cost method with gains or
losses on transactions credited or charged to additional paid-in-
capital. Total shares purchased in 1997, 1996 and 1995 were 3, 170
and 358, respectively. In connection with the rescission of the put
option on the ESOP shares (see Note 14) the Company retired all
13,794 shares of the Company's common stock held in Treasury.
Prior to the merger with Proffitt's, CPS purchased and retired 700
and 905 common shares for $13,096 and $12,327 during the years
ended January 31, 1998 and February 1, 1997.
14 Employee Stock Plans
ESOP
Herberger's sponsored an employee stock ownership plan for the
benefit of its employees. Contributions to the ESOP were made at
the discretion of the Board of Directors and were $0, $3,670 and
$3,418 in 1997, 1996 and 1995, respectively. At various times, the
ESOP purchased shares of the Company's common stock using the
proceeds of ESOP loans. These shares were initially held in a
suspense account by the Plan trustee. As contributions were made
and dividends were paid and the ESOP debt was repaid, shares were
released from suspense and allocated to the accounts of
participants and the Company recognized compensation expense. For
shares acquired after January 30, 1994, ESOP expense was recorded
equal to the estimated fair value of shares allocated and those
shares became outstanding for earnings per share computations. For
all other shares, ESOP expense was recorded equal to the cost of
the shares released. All shares acquired prior to January 30, 1994
were considered outstanding for earnings per share calculations.
Prior to the merger, Herberger's shares distributed from the ESOP
could be put to Herberger's at fair value for cash under certain
conditions. As such, the shares were carried at fair value and not
reflected on the balance sheet in shareholders' equity. Effective
with the merger, the put option was rescinded, and accordingly, the
ESOP shares are reflected in shareholders' equity.
During 1997, the ESOP was terminated. As a result, the Company
received approximately $10,000 in cash representing payment of a
$9,000 note receivable from the ESOP. All previously unallocated
common shares of the Company held by the ESOP were allocated to the
ESOP participants, resulting in a primarily non-cash charge of
$7,900.
Stock Options and Grants
The Company utilizes the intrinsic value method of accounting for
stock option grants. As the option exercise price is generally
equal to or above fair value of the common shares at the date of
the option grant, no compensation cost is recognized.
Had compensation cost for the Company's stock-based compensation
plans been determined under the fair value method, using the Black-
Scholes option-pricing model, the Company's net income and earnings
per share would have been reduced (increased) to the pro forma
amounts indicated below.
<TABLE>
January 31, 1998 February 1, 1997 February 3,1996
---------------- ---------------- ---------------
As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
------------- ----------- ------------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Net income $404,914 $395,237 $80,832 $73,041 $(5,726) $(7,110)
Basic earnings per
common share $2.94 $2.87 $0.62 $0.55 $(0.07) $(0.08)
Diluted earnings per
common share $2.79 $2.72 $0.60 $0.54 $(0.07) $(0.08)
</TABLE>
The four assumptions for determining compensation costs under the
fair value method include 1) a risk-free interest rate based on
zero-coupon government issues on each grant date with the maturity
equal to the expected term of the option (6.22%, 6.15% and 5.94%
for 1997, 1996 and 1995, respectively), 2) an expected term of five
years, 3) an expected volatility of 39.7%, 34.4% and 32.3% for
1997, 1996 and 1995, respectively, and 4) no expected dividend
yield.
The Company maintains stock option plans for the granting of
options, stock appreciation rights and restricted shares to
officers, employees and directors. At January 31, 1998 the Company
has available for grant 2,832 shares of common stock. Options
granted generally vest over a four-year period after issue and have
an exercise term of ten years from the grant date. Restricted
shares generally vest ten years after grant date with accelerated
vesting at the discretion of the Company's Board of Directors if
the Company meets certain performance objectives.
A summary of the stock option plans for 1997, 1996 and 1995 is
presented below:
<TABLE>
<CAPTION>
1997 1996 1995
------------------- ------------------ -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 8,780 $14.07 6,859 $11.42 6,260 $10.86
Granted 3,519 25.90 2,686 22.39 1,361 13.18
Converted in acquisition 812 11.25
Exercised (2,027) 11.37 (1,288) 11.46 (418) 7.64
Forfeited (705) 25.27 (289) 12.81 (344) 12.57
------- ------- ------- ------- ------- -------
Outstanding at end of year 9,567 $18.17 8,780 $14.71 6,859 $11.42
Options exercisable at year end 5,929 $13.88 5,115 $11.59 4,989 $10.15
------- ------- ------- ------- ------- -------
Weighted average fair value of
options granted during the year $10.80 $6.46 $6.94
======= ======= =======
The following table summarizes information about stock options
outstanding at January 31, 1998:
Options Oustanding Options Exercisable
-------------------------------- -----------------------
Weighted
Number Average Number
Outstanding Remaining Weighted Exercisable Weighted
at Contractual Average at Average
January 31, Life Exercise January 31, Exercise
Range of Exercise Price 1998 (Years) Price 1998 Price
- ----------------------- --------- --------- --------- --------- --------
$3.75 to $5.63 219 3 $ 4.68 219 $ 4.68
$5.64 to $8.45 1,005 6 5.90 1,005 5.90
$8.46 to $12.69 2,673 6 11.47 2,438 11.37
$12.70 to $19.06 1,915 8 17.68 1,010 16.89
$19.07 to $28.60 1,216 8 20.27 705 19.61
$28.61 to $48.78 2,539 9 30.74 552 30.11
-------- -------- -------- -------- -------
9,567 $ 18.17 5,929 $ 13.88
======== ======== ======== =======
</TABLE>
The Company also granted restricted stock awards of 176, 258 and 40
shares to certain employees in 1997, 1996 and 1995, respectively.
The fair value of these awards on the dates of grants was $4,600,
$3,763 and $499 for 1997, 1996 and 1995, respectively. During 1997,
1996 and 1995, compensation cost of $5,700, $2,239 and $449,
respectively, has been recognized in connection with these awards.
Stock Purchase Plan
The stock purchase plan (the "Plan") provides that an aggregate of
700 shares of the Company's common stock is available for purchase.
Under the Plan, an eligible employee may elect to participate by
authorizing limited payroll deductions to be applied toward the
purchase of common stock at a 15% discount to market value. Under
the Plan, 62 and 28 shares of the Company's common stock were
purchased by employees in 1997 and 1996 respectively. At January
31, 1998, the Plan has available for future offerings 583 shares.
15 Commitments and Contingencies
In 1992, CPS commenced an adversary proceeding in the Bankruptcy
Court against Bank One, Milwaukee, N.A. ("Bank One"). In the
adversary proceeding, the Company alleges, among other things, that
Bank One made an illegal setoff of $31,207 from the Company's
Predecessor's account at Bank One in order to reimburse itself for
a $31,207 payment Bank One made to Associated Merchandising
Corporation ("AMC") under a letter of credit Bank One issued to
AMC. In July 1995, the Bankruptcy Court granted the CPS motion for
summary judgment in the amount of $37,565, plus costs, against Bank
One. The Bankruptcy Court's ruling is currently being appealed by
Bank One and the Company is appealing the Bankruptcy Court's denial
of prejudgment interest. Bank One has asserted that the Company's
recovery is subject to a 33% reduction in accordance with the
distribution Bank One would receive as an unsecured creditor under
the Plan of Reorganization. While the Company believes strongly in
its causes of action, the ultimate outcome of this proceeding
cannot be determined with certainty. In accordance with generally
accepted accounting principles, no gain has been recognized in the
accompanying consolidated financial statements.
CPS and its subsidiaries emerged from Chapter 11 bankruptcy in
1993. The Company recognized $680, $1,280 and $725 in 1997, 1996
and 1995, respectively, to reflect the favorable resolution of
claims. Management believes CPS has adequately provided for the
resolution of all bankruptcy claims and other matters related to
the Plan of Reorganization remaining at January 31, 1998.
The Company is involved in several legal proceedings arising
from its normal business activities, and reserves have been
established where appropriate. Management believes that none of
these legal proceedings will have a material adverse effect on the
Company's consolidated financial condition, results of operations
or liquidity.
16 Related Party Transactions
In 1989, an unsecured $500 interest-free loan, due January 31,
1999, was made as a supplement to the Chairman of the Board and
Chief Executive Officer's ("CEO") base compensation. During 1997,
the Company agreed to forgive the loan in one-fifth increments over
five years, providing that the CEO remains employed by the Company.
During 1996 and 1995, the Company paid $796 and $1,950 of
preferred stock dividends and a $3,032 payment for early conversion
of the preferred stock to an investment group in which a Director
is a partner.
Prior to the merger of Proffitt's and SFA, a shareholder of
SFA provided various consulting and advisory services to SFA under
an agreement which expired in July 1996. The fees paid or payable
for such services were approximately $1,000 and $7,000 in 1996 and
1995, respectively.
17 Fair Values of Financial Instruments
The Company has entered into interest rate cap agreements to
reduce the impact of increases in interest rates on real estate
financing. The Company is also an indirect beneficiary of interest
rate cap agreements relating to the accounts receivable
securitization. At January 31, 1998, there were five interest rate
cap agreements outstanding. Accordingly, the Company is entitled
to receive from various financial institutions the amount, if any,
by which the Company's interest payments on its debt exceed the
stated interest rates or strike rates. Payments received as a
result of the caps in the Company's debt are recorded as a
reduction of interest expense.
The following is a summary of the interest rate cap
agreements related to real estate financing as of January 31, 1998:
Notional Effective Expiration
Amount Strike Rate Date Date
---------- ----------- --------- ----------
$87,500 9.70% 2/12/97 5/13/02
$87,500 9.70% 2/12/97 5/13/02
The combined carrying value and fair value of the Company's
interest rate agreements were $1,496 and $124 as of January 31,
1998, and $2,319 and $870 at February 1, 1997, respectively.
During 1996, the Company entered into financial fixed-rate
swap agreements, which were renegotiated in 1997. The Company is
obligated to pay a fixed rate of interest and will receive a
floating rate based on LIBOR. These swaps may be extended for an
additional year at the option of the swap counterparty. The
Company uses interest rate swaps solely as a risk management tool
with an objective of managing the level of interest rate risk
relating to its accounts receivable securitization.
The following is a summary of the interest rate swap agreements as
of January 31, 1998:
Notional Effective Expiration
Amount Strike Rate Date Date
---------- ----------- --------- ----------
$250,000 6.02% 2/20/97 2/20/98
$250,000 5.83% 2/20/98 4/20/01
At January 31, 1998, the combined carrying value and fair
value of the Company's financial fixed-rate swap agreements was $0
and ($3,296), respectively.
The fair values of the Company's other financial instruments,
which consist of cash and cash equivalents, accounts receivable,
accounts payable, and short-term debt approximate their carrying
amounts reported in the consolidated balance sheets, due to the
immediate or short-term maturity of these instruments. For
variable rate notes that reprice frequently, fair value
approximates carrying value. The fair value of fixed rate notes is
estimated using discounted cash flow analyses with interest rates
currently offered for loans with similar terms and credit risk. As
of January 31, 1998 and February 1, 1997, the fair value of fixed
rate notes approximated the carrying value.
The fair values of the 8.125% and 9.875% notes and the 5.5%
and 4.75% convertible debentures are based on quoted market prices.
For the junior debentures, the fair value is estimated using
discounted cash flow analyses with interest rates offered for
financial instruments with similar terms and credit risk.
The fair values of the Company's aforementioned financial
instruments at January 31, 1998 and February 1, 1997 were as
follows:
Estimated
Carrying Amount Fair Value
------------------ -------------
January 31, 1998
REMIC Certificates $300,841 $315,700
8.125% senior notes $125,000 $132,700
9.875% notes $10,964 $11,731
5.5% convertible debentures $276,000 $246,081
February 1, 1997
REMIC Certificates $315,841 $332,300
4.75% convertible debentures $86,250 $ 84,525
9.875% notes $125,000 $127,500
7.5% junior debentures $14,517 $14,517
5.5% convertible debentures $276,000 $262,200
The fair value of the long-term debt, interest rate cap agreements
and interest rate swap agreements were estimated based on quotes
obtained from financial institutions for those or similar
instruments or on the basis of quoted market prices.
18 Merger Restructuring and Integration Charges
Merger and special charges incurred in fiscal years 1997, 1996 and
1995 (before income taxes) were as follows:
<TABLE>
1997 1996 1995
------- -------- --------
<S> <C> <C> <C>
Related to current year's merger:
Merger transaction costs, principally investment
banking, legal and other direct merger costs $ 13,800 $2,649 $8,778
Severance and related benefits 11,100 3,129 3,235
Conversion and consolidation of systems and
administrative operations 3,355
Abandonment and write-down of duplicate data
processing equipment and software and other assets 6,200 885 15,922
Other integration costs 10,287
Related to all mergers, acquisitions and other
restructurings:
Termination of Younkers benefit plan 1,362
Conversion and consolidation of systems 2,600 4,549
Termination of merchandise purchasing agreements 3,900
Exit costs related to the Yonkers distribution center 19,015
Severance, relocation and other integration costs
associated with all mergers and acquisitions and SFA
consulting fees 5,924 1,000 7,000
Revisions to prior year estimates:
1995 charges associated with exit of Yonkers
distribution center (7,000)
-------- -------- --------
$ 36,524 $ 16,929 $ 64,237
======= ======== ========
</TABLE>
A reconciliation of the above charges to the amounts remaining
unpaid at January 31, 1998 was as follows:
<TABLE>
1997 1996 1995
------- -------- --------
<S> <C> <C> <C>
Merger, restructuring and integration charges $ 43,524 $ 16,929 $ 64,237
Revisions to prior year estimate (7,000)
Amounts representing non-cash charges (14,500) (2,417) (14,586)
Amounts paid in 1995 (26,651)
Amounts paid in 1996 (8,308) (11,913)
Amounts paid in 1997 (7,111) (5,434) (776)
--------- --------- ----------
Amounts unpaid at January 31, 1998 $ 21,913 $ 770 $ 3,311
========= ========= ==========
</TABLE>
19 Hostile Takeover Attempt
In 1995, prior to the Company's and Younkers merger, Younkers was
subjected to a hostile takeover attempt by CPS. In defending itself
against this takeover attempt, Younkers incurred legal fees and
investment banker advisory fees aggregating $3,182, while CPS's
charges related to this takeover attempt totaled $6,835.
20 Year 2000
The Company has completed its assessment of the year 2000 effect on
the Company's systems and began the necessary systems modifications
during 1997, resulting in expense of approximately $6,600.
21 Quarterly Financial Information
<TABLE>
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- --------- ------- --------
<S> <C> <C> <C> <C>
Fiscal year ended January 31, 1998
Net sales $1,302,118 $1,188,351 $1,417,041 $1,818,836
Gross margin $451,103 $402,557 $513,844 $627,549
Income (loss) before extraordinary loss $25,198 $(4,734) $39,606 $356,167
Net income (loss) $21,846 $(5,854) $38,994 $349,928
Basic earnings (loss) per common share:
Before extraordinary items $0.19 $(0.03) $0.29 $2.52
After extraordinary items $0.16 $(0.04) $0.28 $2.48
Diluted earnings (loss) per common share:
Before extraordinary items $0.18 $(0.03) $0.28 $2.38
After extraordinary items $0.16 $(0.04) $0.27 $2.34
Fiscal year ended February 1, 1997
Net sales $1,063,590 $969,679 $1,193,015 $1,700,578
Gross margin $365,307 $326,056 $430,772 $595,738
Income (loss) before extraordinary loss $1,653 $(17,382) $20,388 $88,919
Net income (loss) $1,653 $(20,722) $13,933 $85,968
Basic earnings (loss) per common share:
Before extraordinary items $0.01 $(0.17) $0.16 $0.66
After extraordinary items $0.01 $(0.19) $0.11 $0.64
Diluted earnings (loss) per common share:
Before extraordinary items $0.01 $(0.17) $0.15 $0.62
After extraordinary items $0.01 $(0.19) $0.10 $0.60
</TABLE>
22 Condensed Consolidating Financial Information
The following tables present condensed consolidating financial
information for 1997 and 1996 for: 1) Saks Incorporated; 2) on a
combined basis, the guarantors of Saks Incorporated Senior Notes
(which are all of the wholly-owned subsidiaries of Saks
Incorporated, except for PCC, YCC, NBGL, SFC and the REMIC trusts;
and 3) on a combined basis, PCC, YCC, NBGL, SFC and the REMIC
trusts, the only non-guarantor subsidiaries of the Senior Notes.
The operations of the non-guarantor subsidiaries were not
significant for 1995. Separate financial statements of the
guarantor subsidiaries are not presented because the guarantors are
jointly, severally, and unconditionally liable under the
guarantees, and the Company believes the condensed consolidating
financial statements are more meaningful in understanding the
financial position of the guarantor subsidiaries.
Saks Incorporated is comprised of substantially all of the
Proffitt's and Younkers stores and certain corporate management and
financing functions. Borrowings and the related interest expense
under the Company's revolving credit facility are allocated to Saks
Incorporated and the guaranty subsidiaries under an informal
lending arrangement. There are also management and royalty fee
arrangements among Saks Incorporated and the subsidiaries.
Condensed Consolidating Statements of Income
For the year ended January 31, 1998
(Dollars in thousands)
<TABLE>
Non-
Saks Guarantor Guarantor
Incorp- Subsid- Subsid- Elimin- Consol-
orated iaries iaries ations idated
-------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Net sales $746,896 $4,979,450 $5,726,346
Cost of sales 480,435 3,250,858 3,731,293
--------- ---------- --------- --------- -----------
Gross margin 266,461 1,728,592 1,995,053
Selling, general and admin-
istrative expenses 156,787 1,111,830 $47,700 $(151,199) 1,165,118
Other operating expenses 56,343 405,979 (35,064) 427,258
Store pre-opening costs 412 16,606 17,018
Merger, restructuring and
integration costs 11,500 25,024 36,524
(Gains) from long-lived assets (8) (126) (134)
Year 2000 expenses 357 6,233 6,590
ESOP expenses 9,513 9,513
--------- ---------- --------- --------- -----------
Operating income (loss) 41,070 153,533 (12,636) 151,199 333,166
Other Income (Expense)
Finance charge income, net 151,199 (151,199)
Intercompany gain (loss) on
sale of receivables (4,627) (20,503) 25,130
Intercompany servicer fees 13,372 (13,372)
Equity in earnings of sub-
sidiaries 397,357 58,804 (456,161)
Interest expense, net (10,612) (59,373) (43,700) (113,685)
Other income (expense), net (178) 2,279) 229 2,330
--------- ---------- --------- --------- -----------
Income before provision for
income taxes and extra-
ordinary item 423,010 148,112 106,850 (456,161) 221,811
Provision (benefit) for income taxes 14,753 (242,283) 33,104 (194,426)
--------- ---------- --------- --------- -----------
Income before extraordinary
item 408,257 390,395 73,746 (456,161) 416,237
Extraordinary item, net of
taxes 3,343 6,424 1,556 11,323
--------- ---------- --------- --------- -----------
Net income $404,914 $383,971 $72,190 $(456,161) $404,914
========= ========= ========= ========= ==========
</TABLE>
Condensed Consolidating Balance Sheets
For the year ended January 31, 1998
(Dollars in thousands)
<TABLE>
Non-
Saks Guarantor Guarantor
Incorp- Subsid- Subsid- Elimin- Consol-
orated iaries iaries ations idated
-------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Assets
Current Assets
Cash and cash equivalents $15,405 $(4,594) $40,053 $50,864
Trade accounts receivable 113 273 411,823 412,209
Merchandise inventories 171,212 1,073,470 1,244,682
Deferred income taxes 6,797 58,570 6,447 71,814
Intercompany borrowings 30,715 90,293 $(121,008)
Other current assets 6,777 98,292 6,552 111,621
--------- ---------- --------- --------- -----------
Total Current Assets 231,019 1,316,304 464,875 (121,008) 1,891,190
Property and Equipment, net 186,266 953,642 586,071 1,725,979
Goodwill and Intangibles, net 7,340 319,967 327,307
Other Assets 2,297 39,731 25,901 67,929
Deferred Income Taxes (8,683) 266,531 257,848
Investment in and Advances
to Subsidiaries 1,959,326 1,352,541 (3,311,867)
--------- ---------- --------- --------- -----------
Total Assets $2,377,565 $4,248,716 $1,076,847 $(3,432,875) $4,270,253
========= ========== ========= ========= ===========
Liabilities and Shareholders' Equity
Current Liabilities
Trade accounts payable $39,713 $294,081 $333,794
Accrued expenses and other
current liabilities 45,563 380,800 $27,671 454,034
Intercompany borrowings 121,008 $(121,008)
Current portion of long-term debt 452 12,606 13,058
--------- ---------- --------- --------- -----------
Total Current Liabilities 85,728 687,487 148,679 (121,008) 800,886
Senior Debt 336,545 331,420 425,841 1,093,806
Other Long-Term Liabilities 10,763 131,476 1,829 144,068
Subordinated Debt 286,964 286,964
Investment by and Advances
from Parent 2,811,369 500,498 (3,311,867)
Shareholders' Equity 1,944,529 1,944,529
--------- ---------- --------- --------- -----------
Total Liabilities and
Shareholders' Equity $2,377,565 $4,248,716 $1,076,847 $(3,432,875) $4,270,253
========= ========== ========= ========= = ==========
</TABLE>
Condensed Consolidating Statements Cash Flow
For the year ended January 31, 1998
(Dollars in thousands)
<TABLE>
Non-
Saks Guarantor Guarantor
Incorp- Subsid- Subsid- Elimin- Consol-
orated iaries iaries ations idated
-------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Operating Activities
Net income $404,914 $383,971 $72,190 $(456,161) $404,914
Adjustments to reconcile net
income to net cash provided
by operating activities:
Equity in earnings of
subsidiaries (397,357) (58,804) 456,161
Depreciation and amortization 12,874 103,240 20,005 136,119
Deferred income taxes 222 24,397 (1,569) 23,050
Recognition of NOL carryforwards (283,675) (283,675)
Extraordinary loss on exting-
uishment of debt 1,425 5,375 1,556 8,356
(Gains) losses from long
lived assets (8) (126) (134)
ESOP expenses 8,786 8,786
Restructuring items (800) (800)
Changes in operating assets
and liabilities, net 52,575 (124,864) (15,022) (87,311)
--------- ---------- --------- --------- -----------
Net cash provided by
operating activities 74,645 57,500 77,160 209,305
Investing Activities
Purchases of property
equipment, net (13,349) (253,807) (79,720) (346,876)
Proceeds from sale and sale
leaseback of assets 23,221 4,630 27,851
--------- ---------- --------- --------- -----------
Net cash provided by (used in)
investing activities 9,872 (249,177) (79,720) (319,025)
Financing Activities
Intercompany borrowings,
contributions and distrib-
utions (226,093) 184,610 41,483
Proceeds from long-term
borrowings 175,546 175,546
Payments on long-term debt (32,720) (191,414) (224,134)
Net borrowings under credit and
receivables facility 132,082 11,392 143,474
Payment of REMIC certificates (30,000) (30,000)
Proceeds from issuance of stock 15,762 7,423 23,185
Purchase of treasury stock (13,096) (13,096)
ESOP loan repayment 9,778 9,778
Payments to preferred and
common shareholders (1,124) (1,124)
--------- ---------- --------- --------- -----------
Net cash provided by (used in)
financing activities (80,601) 141,355 22,875 83,629
Increase (decrease) in cash and
cash equivalents 3,916 (50,322) 20,315 (26,091)
Cash and cash equivalents at
beginning of period 11,489 45,728 19,738 76,955
--------- ---------- --------- --------- -----------
Cash and cash equivalents at
end of period $15,405 $(4,594) $40,053 $50,864
========= ========== ========= ========= ===========
</TABLE>
Condensed Consolidating Statements of Income
For the year ended February 1, 1997
(Dollars in thousands)
<TABLE>
Non-
Saks Guarantor Guarantor
Incorp- Subsid- Subsid- Elimin- Consol-
orated iaries iaries ations idated
-------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Net sales $737,902 $4,188,960 $4,926,862
Cost of sales 461,117 2,747,872 3,208,989
--------- ---------- --------- --------- -----------
Gross margin 276,785 1,441,088 1,717,873
Selling, general and administr-
ative expenses 172,219 976,472 $ 38,631 $(130,178) 1,057,144
Other operating expenses 57,026 333,599 (35,023) 355,602
Store pre-opening costs 11,645 11,645
Merger, restructuring and
integration costs 8,729 8,200 16,929
Year 2000 expenses 1,406 1,406
ESOP expenses 3,910 3,910
--------- ---------- --------- --------- -----------
Operating income (loss) 38,811 105,856 (3,608) 130,178 271,237
Other Income (Expense)
Finance charge income, net 8,500 12,691 108,987 (130,178)
Intercompany gain (loss) on
sale of receivables (2,475) (18,550) 21,025
Intercompany servicer fees 6,749 (6,749)
Equity in earnings of sub-
sidiaries 55,184 58,868 (114,052)
Interest expense, net (6,404) (63,323) (45,154) (114,881)
Other income (expense), net 7,319 (19,186) 87 (11,780)
--------- ---------- --------- --------- -----------
Income before provision for
income taxes and extra-
ordinary item 100,935 83,105 74,588 (114,052) 144,576
Provision for income taxes 20,103 20,968 9,927 50,998
--------- ---------- --------- --------- -----------
Income before extraordinary item 80,832 62,137 64,661 (114,052) 93,578
Extraordinary item, net of taxes 10,722 2,024 12,746
--------- ---------- --------- --------- -----------
Net income $80,832 $51,415 $62,637 $(114,052) $80,832
========= ========== ========= ========= ==========
</TABLE>
Condensed Consolidating Balance Sheets
For the year ended February 1, 1997
(Dollars in thousands)
<TABLE>
Non-
Saks Guarantor Guarantor
Incorp- Subsid- Subsid- Elimin- Consol-
orated iaries iaries ations idated
-------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Assets
Current Assets
Cash and cash equivalents $11,489 $45,728 $19,738 $76,955
Trade accounts receivable 167 31 394,830 395,028
Merchandise inventories 183,285 884,899 1,068,184
Deferred income taxes 7,814 4,492 3,999 16,305
Intercompany borrowings 15,518 99,516 $(115,034)
Other current assets 18,925 67,778 23,336 110,639
--------- ---------- --------- --------- -----------
Total Current Assets 237,198 1,102,444 441,903 (115,034) 1,666,511
Property and Equipment, net 183,477 808,009 526,856 1,518,342
Goodwill and Intangibles, net 8,131 359,758 367,889
Other Assets 3,092 41,237 33,205 77,534
Investment in and Advances to
Subsidiaries 1,228,516 921,569 (2,150,085)
--------- ---------- --------- --------- -----------
Total Assets $1,660,414 $3,233,017 $1,001,964 $(2,265,119) $3,630,276
========= ========== ========= ========= ==========
Liabilities and Shareholders' Equity
Current Liabilities
Trade accounts payable $34,418 $286,656 $321,074
Accrued expenses and other
current liabilities 22,915 300,274 $49,690 372,879
Intercompany borrowings 115,034 $(115,034)
Current portion of long-term
debt 4,686 16,120 20,806
--------- ---------- --------- --------- -----------
Total Current Liabilities 62,019 603,050 164,724 (115,034) 714,759
Senior Debt 157,077 277,046 429,352 863,475
Deferred Income Taxes 10,090 10,931 21,021
Other Long-Term Liabilities 18,777 110,616 1,927 131,320
Subordinated Debt 14,517 487,250 501,767
Investment by and Advances
from Parent 1,744,124 405,961 (2,150,085)
Shareholders' Equity 1,397,934 1,397,934
--------- ---------- --------- --------- -----------
Total Liabilities and
Shareholders' Equity $1,660,414 $3,233,017 $1,001,964 $(2,265,119) $3,630,276
=========== =========== =========== ============ ============
</TABLE>
Condensed Consolidating Statements Cash Flow
For the year ended February 1, 1997
(Dollars in thousands)
<TABLE>
Non-
Saks Guarantor Guarantor
Incorp- Subsid- Subsid- Elimin- Consol-
orated iaries iaries ations idated
-------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Operating Activities
Net income $80,832 $51,415 $62,637 $(114,052) $80,832
Adjustments to reconcile net
income to net cash provided
by operating activities:
Equity in earnings of
subsidiaries (55,184) (58,868) 114,052
Depreciation and amortization 14,123 89,545 19,865 123,533
Deferred income taxes 8,901 22,679 48 31,628
Extraordinary loss on
extinguishment of debt 10,722 2,024 12,746
Loss on County Seat Debentures 10,525 10,525
Losses from long lived assets 1,406 1,406
ESOP expenses 1,481 1,481
Restructuring items 885 885
Changes in operating assets
and liabilities, net (34,394) (61,574) (26,373) (122,341)
---------- ---------- ---------- --------- ---------
Net cash provided by
operating activities 14,278 68,216 58,201 140,695
Investing Activities
Purchases of property and
equipment, net (8,544) (226,102) (13,168) (247,814)
Proceeds from sale and sale
leaseback of assets 5,410 30,872 36,282
Acquisition of Parisian (119,070) (119,070)
---------- ---------- ---------- --------- ---------
Net cash used in investing
activities (3,134) (314,300) (13,168) (330,602)
Financing Activities
Intercompany borrowings, contri-
butions and distributions (121,314) 125,880) (4,566)
Proceeds from long-term
borrowings 113,037 267,800 380,837
Payments on long-term debt (19,727) (370,370) (390,097)
Net borrowings under credit and
receivables facility (201,820) (35,637) (237,457)
Payment of REMIC certificates (4,159) (4,159)
Proceeds from issuance of stock 35,438 422,094 457,532
Purchase of treasury stock (14,383) (14,383)
ESOP loan repayment (742) (742)
Payments to preferred and
common shareholders (4,858) (4,858)
---------- ---------- ---------- --------- ---------
Net cash provided by (used in)
financing activities (6,949) 237,984) (44,362) 186,673
Increase (decrease) in cash and
cash equivalents 4,195 (8,100) 671 (3,234)
Cash and cash equivalents at
beginning of period 7,294 53,828 19,067 80,189
---------- ---------- ---------- --------- ---------
Cash and cash equivalents at end
of period $11,489 $45,728 $19,738 $76,955
========= ======== ======== ======== =========
</TABLE>
Reports
Report of Management
The accompanying supplemental consolidated financial statements,
including the notes thereto, and the other financial information
presented in the supplemental Annual Report have been prepared by
management. The financial statements have been prepared in
accordance with generally accepted accounting principles and
include amounts that are based upon our best estimates and
judgments. Management is responsible for the supplemental
consolidated financial statements, as well as the other financial
information in this supplemental Annual Report.
The Company maintains an effective system of internal
accounting control. We believe that this system provides reasonable
assurance that transactions are executed in accordance with
management authorization and that they are appropriately recorded
in order to permit preparation of financial statements in
conformity with generally accepted accounting principles and to
adequately safeguard, verify, and maintain accountability of
assets. Reasonable assurance is based on the recognition that the
cost of a system of internal control should not exceed the benefits
derived.
The supplemental consolidated financial statements and related
notes have been audited by independent certified public
accountants. Management has made available to them all of the
Company's financial records and related data and believes all
representations made to them during their audits were valid and
appropriate. Their report provides an independent opinion upon the
fairness of the supplemental financial statements.
The Audit Committee of the Board of Directors is composed of
three independent Directors. The Committee is responsible for
recommending the independent certified public accounting firm to be
retained for the coming year, subject to shareholder approval. The
Audit Committee meets periodically with the independent auditors,
as well as with management, to review accounting, auditing,
internal accounting control, and financial reporting matters. The
independent auditors have unrestricted access to the Audit
Committee.
R. Brad Martin Douglas E. Coltharp
Chairman of the Board and Executive Vice President and
Chief Executive Officer Chief Financial Officer
Report of Independent Accountants
To the Board of Directors and Shareholders
Saks Incorporated
We have audited the accompanying supplemental consolidated balance
sheets of Saks Incorporated and Subsidiaries (formerly Proffitt's,
Inc.) as of January 31, 1998 and February 1, 1997, and the related
supplemental consolidated statements of income, shareholders equity
and cash flows for each of the three years in the period ended
January 31, 1998. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards 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. 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.
The supplemental consolidated financial statements give
retroactive effect to the merger of Proffitt's, Inc. with Saks
Holdings, Inc. This combination occurred on September 17, 1998,
and has been accounted for as a pooling of interests as described
in Notes 1 and 3 to the supplemental consolidated financial
statements. In connection with the merger, Proffitt's, Inc.
changed its name to Saks Incorporated. Generally accepted
accounting principles proscribe giving effect to a consummated
business combination accounted for by the pooling-of-interests
method in financial statements that do not include the date of
consummation; however, they will become the historical consolidated
financial statements of Saks Incorporated and Subsidiaries after
financial statements covering the date of consummation of the
business combination are issued.
In our opinion, the supplemental consolidated financial
statements referred to above present fairly, in all material
respects, the consolidated financial position of Saks Incorporated
and Subsidiaries as of January 31, 1998 and February 1, 1997, and
the consolidated results of their operations and their cash flows
for each of the three years in the period ended January 31, 1998,
in conformity with generally accepted accounting principles after
financial statements are issued for a period which includes the
date of consummation of the business combination.
PricewaterhouseCoopers LLP
Birmingham, Alabama
March 19, 1998, except for Notes 1, 3,
4, 9, 11 and 13 as to which
the date is September 17, 1998
SAKS INCORPORATED and SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
August 1, August 2,
1998 January 31, 1997
(Unaudited) 1998 (Unaudited)
-------- --------- ---------
ASSETS
Current assets
Cash and cash equivalents $31,411 $50,864 $43,378
Trade accounts receivable 137,418 412,209 367,529
Merchandise inventories 1,369,498 1,244,682 1,189,870
Other current assets 82,627 111,621 108,860
Deferred income taxes 66,883 71,814 20,359
--------- --------- ---------
Total current assets 1,687,837 1,891,190 1,729,996
Property and equipment, net 1,822,735 1,725,979 1,598,893
Goodwill and intangibles,
net 333,462 327,307 362,908
Deferred income taxes 242,930 257,848
Other assets 70,175 67,929 77,638
---------- ---------- -----------
TOTAL ASSETS $4,157,139 $4,270,253 $3,769,435
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Trade accounts payable $376,671 $333,794 $414,877
Accrued expenses and other
current liabilities 367,982 454,034 299,536
Current portion of long-
term debt 13,642 13,058 15,626
---------- ---------- -----------
Total current liabilities 758,295 800,886 730,039
Senior debt 980,840 1,093,806 966,112
Deferred income taxes 29,501
Other long-term liabilities 142,165 144,068 141,740
Subordinated debt 276,000 286,964 473,511
Shareholders' equity 1,999,839 1,944,529 1,428,532
---------- ---------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $4,157,139 $4,270,253 $3,769,435
========== ========== ==========
See notes to supplemental condensed consolidated financial
statements
<TABLE>
SAKS INCORPORATED and SUBSIDIARIES SUPPLEMENTAL CONDENSED CONSOLIDATED
STATEMENTS OF INCOME (UNAUDITED)
(Dollars in thousands, except per share amounts)
Three Months Ended Six Months Ended
------------------ -------------------
8/1/98 8/2/97 8/1/98 8/2/97
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Net sales $1,283,744 $1,188,351 $2,696,346 $2,490,469
Cost of sales 838,850 785,794 1,761,420 1,636,809
---------- ---------- ---------- ----------
Gross margin 444,894 402,557 934,926 853,660
Selling, general, and administr-
ative expenses 291,636 263,507 588,245 542,471
Other operating expenses:
Property and equipment rentals 41,829 34,615 83,917 70,048
Depreciation & other amortization 35,821 32,253 71,570 65,353
Taxes other than income taxes 36,122 33,337 73,469 68,450
Store pre-opening costs 626 2,692 2,998 5,235
Merger, restructuring and integr-
ation costs 3,995 1,634 5,951 3,102
Loss on long-lived assets 1,858 3 1,855 30
Year 2000 Expense 2,602 3,745 4,127 4,362
ESOP Expenses 806 1,532
---------- ---------- ---------- -----------
Operating Income 30,405 29,965 102,794 93,077
Other income (expense):
Interest expense (24,498) (28,972) (49,292) (57,497)
Other income (expense), net 626 253 754 389
---------- ---------- ---------- -----------
Income before provision for income
taxes and extraordinary items 6,533 1,246 54,256 35,969
Provision for income taxes 3,551 5,980 23,150 15,505
---------- ---------- ---------- -----------
Income (loss) before extra-
ordinary item 2,982 (4,734) 31,106 20,464
Extraordinary loss on extinguishment
of debt, net of taxes 334 1,120 334 4,472
---------- ---------- ---------- -----------
Net income (loss) $2,648 $(5,854) $30,772 $15,992
========== ========== ========== ===========
Basic earnings (loss) per share:
Net income (loss) before extra-
ordinary item $0.02 $(0.03) $0.22 $0.15
Extraordinary item - (0.01) - (0.03)
---------- ---------- ---------- -----------
Net income (loss) $0.02 $(0.04) $0.22 $0.12
========== ========== ========== ===========
Diluted earnings (loss) per share:
Net income before extraordinary item $0.02 $(0.03) $0.21 $0.15
Extraordinary item - (0.01) - (0.03)
---------- ---------- ---------- -----------
Net income $0.02 $(0.04) $0.21 $0.12
========== ========== ========== ===========
Weighted average common shares:
Basic 142,869 135,847 142,302 135,550
Diluted 146,969 135,847 146,463 138,795
</TABLE>
See notes to supplemental condensed consolidated financial statements.
SAKS INCORPORATED AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED STATEMENTS OF
CASH FLOWS (Unaudited)
(Dollars in thousands)
Six Months Ended
----------------------
August 1, August 2,
1998 1997
-------- --------
Operating Activities:
Net income $30,772 $15,992
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 71,570 65,353
Losses from long-lived assets 1,855 30
Extraordinary loss on extinguisment
of debt 3,352
ESOP expenses 694
Deferred income taxes 16,694 3,604
Other 4,104
Change in operating assets and
liabilities, net 138,824 (35,479)
---------- ---------
Net Cash Provided By Operating
Activities 259,715 57,650
Investing Activities:
Purchases of property and
equipment, net (159,731) (164,778)
Proceeds from sale of assets 2,500 24,747
Acquisition of other assets (17,676) -
Other, net (1,442)
---------- ---------
Net Cash Used In Investing Activities (174,907) (141,473)
Financing Activities:
Proceeds from long-term borrowings 129,160
Payments on long-term debt and capital
lease obligations (112,932) (140,575)
Net repayments under credit and
receivables facilities (9,550) 56,308
Purchase of treasury stock (7,445)
Proceeds from issuance of stock 18,221 13,922
Payments to preferred and common
shareholders (1,124)
---------- ---------
Net Cash (Used In) Provided By
Financing Activities (104,261) 50,246
Decrease In Cash and Cash Equivalents (19,453) (33,577)
Cash and cash equivalents at beginning
of period 50,864 76,955
---------- ---------
Cash at cash equivalents at end of
period $31,411 $43,378
========== =========
See notes to supplemental condensed consolidated financial
statements.
NOTE 1 BASIS OF PRESENTATION
Effective September 17, 1998, Saks Holdings, Inc. ("SFA") merged with
and into a wholly owned subsidiary of Proffitt's, Inc. SFA is the
holding company of Saks & Company which does business as Saks Fifth
Avenue, Off 5th, Folio, and Bullock & Jones. The merger has been
accounted for as a pooling of interests, and accordingly, these
supplemental consolidated financial statements have been restated
for the prior periods to include the results of operations,
financial position, and cash flows of SFA. In connection with the merger,
Proffitt's, Inc. changed the corporate name of Proffitt's, Inc.
to Saks Incorporated (the "Company"). These supplemental unaudited
condensed consolidated financial statements include the accounts
of the Company and all of its subsidiaries and have been prepared
to give retroactive effect to the merger with SFA. Generally
accepted accounting principles proscribe giving effect to a
completed merger accounted for by the pooling- of-interests
method in financial statements that do not include the effective
date of the merger. These financial statements do not extend
through the effective date of the merger; however, they will become
the historical consolidated financial statements of the Company
after financial statements covering the effective date of the
merger are issued.
These financial statements have been prepared in accordance
with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q
and Article 10 of the Regulation S-X. Accordingly, they do
not include all of the information and footnotes required
by generally accepted accounting principles for complete
financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating
results for the three and six month periods ended August
1, 1998 are not necessarily indicative of the results that
may be expected for the year ending January 30, 1999.
The financial statements include the accounts of the Company
and its subsidiaries, including its special purpose receivables
financing subsidiaries. For further information, refer to
the supplemental consolidated financial statements and
footnotes thereto for the year ended January 31, 1998
included in this Form 8-K.
The accompanying balance sheet at January 31, 1998 has
been derived from the audited financial statements at that date.
NOTE 2 BUSINESS COMBINATIONS
Effective January 31, 1998, immediately before the Company's
prior fiscal year end, the Company combined its business with
Carson Pirie Scott & Co. ("Carson's"), a retail department
store chain currently operating 55 stores in the Midwest.
The merger has been accounted for as a pooling of interests,
and accordingly, the consolidated financial statements have been
restated for the prior year to include the results of operations,
financial position, and cash flows of Carson's.
On March 6, 1998, the Company acquired Brody Brothers Dry
Goods Company, Inc. ("Brody's"), which operated six department
stores in North Carolina. Consideration was paid in cash and
was immaterial to the Company. Four of the Brody's locations
were converted into Proffitt's stores, and two stores were
permanently closed. The operations of these stores are reflected
in the financial statements subsequent to the date of acquisition.
On August 2, 1998, the Company purchased the assets of Bullock &
Jones, which operates a catalog operation and one store in San
Francisco. In fiscal 1997, combined sales for Bullock
& Jones were approximately $30 million, with approximately
two-thirds of the Company's sales derived from catalog sales.
For the three and six months ended August 1, 1998 and August 2,
1997, the Company incurred certain merger, restructuring, and
integration costs related to its business combinations
with Younkers (completed February 3, 1996), Parisian (completed
October 11, 1996), Herberger's (completed February 1, 1997),
Carson's, and Brody's. These pre-tax charges totaled $4.0
million and $1.6 million for the three months ended August 1,
1998 and August 2, 1997, respectively, and $6.0 million and
$3.1 million for the six months ended August 1, 1998 and August
2, 1997, respectively.
A reconciliation of the aforementioned charges to the amounts
of merger, restructuring, and integration costs remaining unpaid
at August 1, 1998 is as follows (in thousands):
Amounts unpaid at January 31, 1998 $ 25,094
Adjustments to amounts unpaid at January 31, 1998 0
Amounts related to continuing integration efforts for the
six months ended August 1, 1998 5,951
Amounts paid during the six months ended August 1, 1998 (18,275)
---------
Amounts unpaid at August 1, 1998 $ 12,770
NOTE 3 -- PENDING TRANSACTION
In August 1998, the Company announced it had entered into an
agreement, subject to certain conditions, to acquire from Dillard's,
Inc. the real and personal property of 15 store locations, along
with certain inventory and accounts receivable. The transaction
is expected to be valued in excess of $400 million and is scheduled
to close by the end of the third fiscal quarter of 1998.
NOTE 4 - EARNINGS PER COMMON SHARE
Calculations of earnings per common share (EPS) for the three and
six months ended August 1, 1998 and August 2, 1997 are as
follows: (net income and shares in thousands)
<TABLE>
For the Quarter Ended For the Quarter Ended
August 1, 1998 August 2, 1997
---------------------------- ------------------------------
Weighted Weighted
Average Per Share Average Per Share
Income (a) Shares Amount Income (a) Shares Amount
--------- -------- -------- --------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $2,982 142,869 $0.02 $(4,734) 135,847 $(0.03)
Effect of
dilutive
stock options
(based on the
treasury stock
method using the
average price) 4,100
-------- --------- ------- -------- ------- --------
Diluted EPS $2,982 146,969 $0.02 $(4,734) 135,847 $(0.03)
======== ======== ======= ======== ======= ========
For the Six Months Ended For the Six Months Ended
August 1, 1998 August 2, 1997
---------------------------- ------------------------------
Weighted Weighted
Average Per Share Average Per Share
Income (a) Shares Amount Income (a) Shares Amount
-------- -------- ------- --------- ------- ---------
Basic EPS $31,106 142,302 $0.22 $20,464 135,550 $0.15
Effect of
dilutive stock
options (based
on the treasury
stock method
using the average
price) 4,161 3,245
-------- --------- ------- ------- ------- --------
Diluted EPS $31,106 146,463 $0.21 $20,464 138,795 $0.15
======== ======== ======= ======== ======= ========
</TABLE>
(a) Income (loss) before extraordinary items.
NOTE 5 CONTINGENCIES
The Company is involved in several legal proceedings arising from
its normal course of business activities, and reserves have been
established where appropriate. Management believes that none of
these legal proceedings will have a material adverse effect on the
Company's consolidated financial condition, results of operations,
or liquidity.
NOTE 6 RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133 is effective for the Company in the first quarter of
fiscal 2000, and the Company is in the process of ascertaining the
impact that this new standard will have on its financial
statements.
NOTE 7 CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The following tables present condensed consolidating financial
information for: 1) Saks Incorporated; 2) on a combined basis,
the guarantors of Saks Incorporated's Senior Notes (which are all
of the wholly-owned subsidiaries of Saks Incorporated, except for
Proffitt's Credit Corporation ("PCC"), Younkers Credit Corporation
("YCC"), the National Bank of the Great Lakes ("NBGL"), SFA real
estate financing subsidiary trusts (REMIC Trusts), and Saks Finance
Company ("SFC"); and 3) on a combined basis, PCC, YCC, REMIC
Trusts, SFC and NBGL, the only non-guarantor subsidiaries of the
Senior Notes. Separate financial statements of the guarantor
subsidiaries are not presented because the guarantors are jointly,
severally, and unconditionally liable under the guarantees, and the
Company believes the condensed consolidating financial statements
are more meaningful in understanding the financial position of the
guarantor subsidiaries. Saks Incorporated is comprised of
substantially all of the Proffitt's and Younkers store operating
divisions and certain corporate management and financing functions.
Borrowings and the related interest expense under Saks
Incorporated's revolving credit facility are allocated to Saks
Incorporated and the guaranty subsidiaries under arrangements among
Saks Incorporated and the subsidiaries.
<TABLE>
SAKS INCORPORATED
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED AUGUST 1, 1998
(Dollars In Thousands)
Non-
Saks Guarantor Guarantor
Incorp- Subsid- Subsid- Elimin- Consol-
orated iaries iaries ations idated
--------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Sales $163,524 $1,120,220 $1,283,744
Costs and Expenses
Cost of sales 104,023 734,827 838,850
Selling, general and
administrative expenses 34,217 273,057 $20,736 ($36,374) 291,636
Other operating expenses 13,970 109,202 (9,400) 113,772
Store pre-opening costs 162 464 626
Merger, restructuring
and integration costs 2,528 1,467 3,995
Loss from long-lived
assets 359 1,499 1,858
Year 2000 expenses 553 2,049 2,602
------- -------- -------- -------- --------
Operating income (loss) 7,712 (2,345) (11,336) 36,374 30,405
Other Income (Expense)
Finance charge income, net 36,374 (36,374)
Intercompany gain (loss)
on sale of receivables (1,197) (4,589) 5,786
Intercompany servicer fees 6,701 (6,701)
Equity in earnings of
subsidiaries (723) 6,281 (5,558)
Interest expense (1,744) (15,464) (7,290) (24,498)
Other income (expense),
net (102) 728 626
------- -------- -------- -------- --------
Income (loss) before provision
for income taxes and
extraordinary item 3,946 (8,688) 16,833 (5,558) 6,533
Provision (benefit) for income taxes 1,298 (3,858) 6,111 3,551
------- -------- -------- -------- --------
Income (loss) before extra-
ordinary item 2,648 (4,830) 10,722 (5,558) 2,982
Extraordinary item, net
of taxes 334 334
------- -------- -------- -------- --------
Net income (loss) $2,648 ($5,164) $10,722 ($5,558) $2,648
======= ======== ======== ======== ========
</TABLE>
<TABLE>
SAKS INCORPORATED
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED AUGUST 1, 1998
(Dollars In Thousands)
Non-
Saks Guarantor Guarantor
Incorp- Subsid- Subsid- Elimin- Consol-
orated iaries iaries ations idated
--------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Sales $337,832 $2,358,514 $2,696,346
Costs and Expenses
Cost of sales 218,829 1,542,591 1,761,420
Selling, general and
administrative expenses 70,571 549,102 $44,049 ($75,477) 588,245
Other operating expenses 27,808 219,163 (18,015) 228,956
Store pre-opening costs 624 2,374 2,998
Merger, restructuring and
integration costs 3,947 2,004 5,951
Loss from long-lived
assets 356 1,499 1,855
Year 2000 expenses 884 3,243 4,127
---------- ---------- ---------- ----------- ----------
Operating income (loss) 14,813 38,538 (26,034) 75,477 102,794
Other Income (Expense)
Finance charge income,
net 75,477 (75,477)
Intercompany gain (loss)
on sale of receivables (2,731) (12,579) 15,310
Intercompany servicer fees 12,940 (12,940)
Equity in earnings of
subsidiaries 24,446 13,113 ($37,559)
Interest expense (2,967) (29,902) (16,423) (49,292)
Other income (expense),
net 4 750 754
---------- ---------- ---------- ----------- ----------
Income before provision for
income taxes and extra-
ordinary item 33,565 22,860 35,390 (37,559) 54,256
Provision for income taxes 2,793 7,558 12,799 23,150
---------- ---------- ---------- ----------- ----------
Income before extra-
ordinary item 30,772 15,302 22,591 (37,559) 31,106
Extraordinary item,
net of taxes 334 334
---------- ---------- ---------- ----------- ----------
Net income $30,772 $14,968 $22,591 ($37,559) $30,772
======== ======== ======== ========= ========
</TABLE>
<TABLE>
SAKS INCORPORATED
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEETS AT AUGUST 1, 1998
(Dollars In Thousands)
Non-
Saks Guarantor Guarantor
Incorp- Subsid- Subsid- Elimin- Consol-
orated iaries iaries ations idated
ASSETS --------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Current Assets
Cash and cash equiv-
alents $14,318 ($30,757) $47,850 $31,411
Trade accounts receiv-
able 1,588 252 135,578 137,418
Merchandise inventories 202,944 1,166,554 1,369,498
Deferred income taxes 6,901 56,571 3,411 66,883
Intercompany borrowings 20,465 ($20,465)
Other current assets 13,237 61,991 7,399 82,627
------- -------- -------- -------- --------
Total Current Assets 259,453 1,254,611 194,238 (20,465) 1,687,837
Property and Equipment,
net 195,960 1,049,673 577,102 1,822,735
Goodwill and Intangibles,
net 19,389 314,073 333,462
Other Assets 4,127 41,552 24,496 70,175
Deferred Income Taxes (16,291) 259,221 242,930
Investment in and Advances
to Subsidiaries 1,888,154 1,344,924 (3,233,078)
---------- ---------- ---------- ----------- ----------
Total Assets $2,350,792 $4,264,054 $795,836 ($3,253,543) $4,157,139
========== ========== ========= ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Trade accounts payable $54,795 $321,876 $376,671
Accrued expenses and other
current liabilities 40,736 300,161 $27,085 367,982
Intercompany borrowings 20,465 ($20,465)
Current portion of long-
term debt 452 13,190 13,642
---------- ---------- ---------- ----------- ----------
Total Current Liabilities 95,983 635,227 47,550 (20,465) 758,295
Senior Debt 242,455 437,544 300,841 980,840
Other Long-Term Liabil-
ities 12,515 127,871 1,779 142,165
Subordinated Debt 276,000 276,000
Investment by and Advances
from Parent 2,787,412 445,666 (3,233,078)
Shareholders' Equity 1,999,839 1,999,839
---------- ---------- ---------- ----------- ----------
Total Liabilities and
Shareholders' Equity $2,350,792 $4,264,054 $795,836 ($3,253,543) $4,157,139
========== ========== ========= ========== ==========
</TABLE>
<TABLE>
SAKS INCORPORATED
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED AUGUST 1, 1998
(Dollars In Thousands)
Non-
Saks Guarantor Guarantor
Incorp- Subsid- Subsid- Elimin- Consol-
orated iaries iaries ations idated
--------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income $30,772 $14,968 $22,591 ($37,559) $30,772
Adjustments to reconcile
net income to net cash
provided by (used) in
operating activities:
Equity in earnings of
subsidiaries (24,446) (13,113) 37,559
Depreciation and amort-
ization 6,898 57,052 9,519 73,469
Deferred income taxes 7,504 8,299 891 16,694
(Gains) losses from long
lived assets 356 1,499 1,855
Changes in operating assets
and liabilities, net (22,190) (117,052) 276,167 136,925
---------- ---------- ---------- ----------- ----------
Net cash provided by (used
in) operating activities (1,106) (48,347) 309,168 -- 259,715
INVESTING ACTIVITIES
Purchases of property
and equipment, net (18,226) (134,949) (6,556) (159,731)
Proceeds from sale of
assets 2,500 2,500
Acquisition of other
assets (17,676) (17,676)
---------- ---------- ---------- ----------- ----------
Net cash used in invest-
ing activities (33,402) (134,949) (6,556) -- (174,907)
FINANCING ACTIVITIES
Inter-company borrowings,
contributions and
distributions 114,090 55,725 (169,815)
Payments on long-term
debt (98,027) (14,905) (112,932)
Net repayments under
credit and receiv-
ables facilities 115,450 (125,000) (9,550)
Proceeds from issuance
of stock 17,358 863 18,221
---------- ---------- ---------- ----------- ----------
Net cash provided by (used
in) financing activities 33,421 157,133 (294,815) -- (104,261)
Increase (decrease) in cash
and cash equivalents (1,087) (26,163) 7,797 (19,453)
Cash and cash equivalents
at beginning of period 15,405 (4,594) 40,053 50,864
---------- ---------- ---------- ----------- ----------
Cash and cash equivalents
at end of period $14,318 ($30,757) $47,850 -- $31,411
========== ========== ========== =========== ==========
</TABLE>
<TABLE>
SAKS INCORPORATED
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED AUGUST 2, 1997
(Dollars In Thousands)
Non-
Saks Guarantor Guarantor
Incorp- Subsid- Subsid- Elimin- Consol-
orated iaries iaries ations idated
--------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Sales $154,553 $1,033,798 $1,188,351
Costs and Expenses
Cost of sales 99,691 686,103 785,794
Selling, general and
administrative expenses 38,067 245,285 $18,401 ($38,246) 263,507
Other operating expenses 12,206 96,426 (8,427) 100,205
Store pre-opening costs 57 2,635 2,692
Merger, restructuring and
integration costs 1,634 1,634
(Gains) losses from long-
lived assets (3) 6 3
Year 2000 expenses 3,745 3,745
ESOP expenses 806 806
---------- ---------- ---------- ---------- -----------
Operating income (loss) 4,535 (2,842) (9,974) 38,246 29,965
Other Income (Expense)
Finance charge income,
net 38,246 ($38,246)
Intercompany gain (loss)
on sale of receivables (158) (4,716) 5,763 (889)
Intercompany servicer fees 3,456 (3,456)
Equity in earnings of
subsidiaries (7,644) 7,590 54
Interest expense (3,302) (15,127) (10,543) (28,972)
Other income (expense),
net (95) 225 123 253
---------- ---------- ---------- ----------- ----------
Income (loss) before pro-
vision for income taxes
and extraordinary item (6,664) (11,414) 20,159 (835) 1,246
Provision (benefit) for income taxes (810) (1,792) 8,798 (216) 5,980
---------- ---------- ---------- ----------- ----------
Income (loss) before extra-
ordinary item (5,854) (9,622) 11,361 (619) (4,734)
Extraordinary item, net of taxes 1,120 1,120
---------- ---------- ---------- ---------- ----------
Net income (loss) ($5,854) (10,742) $11,361 ($619) ($5,854)
========== ========== ========== ========== ==========
</TABLE>
<TABLE>
SAKS INCORPORATED
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED AUGUST 2, 1997
(Dollars In Thousands)
Non-
Saks Guarantor Guarantor
Incorp- Subsid- Subsid- Elimin- Consol-
orated iaries iaries ations idated
--------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Sales $309,957 $2,180,512 $2,490,469
Costs and Expenses
Cost of sales 200,863 1,435,946 1,636,809
Selling, general and
administrative expenses 76,890 510,737 $31,591 ($76,747) 542,471
Other operating expenses 24,640 196,743 (17,532) 203,851
Store pre-opening costs 57 5,178 5,235
Merger, restructuring
and integration costs 98 3,004 3,102
(Gains) losses from long-
lived assets (5) 35 30
Year 2000 expenses 4,362 4,362
ESOP expenses 1,532 1,532
---------- ---------- ---------- ----------- ----------
Operating income (loss) 7,414 22,975 (14,059) 76,747 93,077
Other Income (Expense)
Finance charge income,
net 76,747 (76,747)
Intercompany gain (loss)
on sale of receivables (1,043) (9,001) 11,168 (1,124)
Intercompany servicer fees 6,206 (6,206)
Equity in earnings of
subsidiaries 15,089 17,425 (32,514)
Interest expense, net (6,099) (30,152) (21,246) (57,497)
Other income (expense),
net (136) 402 123 389
---------- ---------- ---------- ----------- ----------
Income before provision
for income taxes and
extraordinary item 15,225 7,855 46,527 (33,638) 35,969
Provision (benefit) for income taxes (767) (1,711) 18,434 (451) 15,505
---------- ---------- ---------- ----------- ----------
Income before extra-
ordinary item 15,992 9,566 28,093 (33,187) 20,464
Extraordinary item 1,836 2,636 4,472
---------- ---------- ---------- ----------- ----------
Net income $15,992 $7,730 $25,457 ($33,187) $15,992
========== ========== ========== =========== ==========
</TABLE>
<TABLE>
SAKS INCORPORATED
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED AUGUST 2, 1997
(Dollars In Thousands)
Non-
Saks Guarantor Guarantor
Incorp- Subsid- Subsid- Elimin- Consol-
orated iaries iaries ations idated
--------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income $15,992 $7,730 $25,457 ($33,187) $15,992
Adjustments to reconcile
net income to net cash
provided by (used) in
operating activities:
Equity in earnings of
subsidiaries (15,089) (17,425) 32,514
Depreciation and amort-
ization 6,764 51,061 7,528 65,353
Deferred income taxes 857 2,476 271 3,604
Extraordinary loss on
extinguishment of debt 3,352 3,352
Amortization of deferred
comp 694 694
(Gains) losses from long
lived assets (5) 35 30
Other 500 3,604 4,104
Changes in operating assets
and liabilities, net (14,396) (58,923) 37,167 673 (35,479)
---------- ---------- ---------- ----------- ----------
Net cash provided by
(used in) operating
activities (5,377) (10,748) 73,775 -- 57,650
INVESTING ACTIVITIES
Purchases of property
and equipment, net (5,390) (113,559) (45,829) (164,778)
Proceeds from sale of
assets 21,347 3,400 24,747
Other, net (1,442) (1,442)
---------- ---------- ---------- ----------- ----------
Net cash provided by
(used in) investing
activities 15,957 (111,601) (45,829) -- (141,473)
FINANCING ACTIVITIES
Inter-company borrowings,
contributions and
distributions (106,730) 89,029 17,701
Proceeds from long-term
borrowings 129,160 129,160
Payments on long-term
debt (31,520) (79,055) (30,000) (140,575)
Net repayments under
credit and receivables
facilities 75,550 (19,242) 56,308
Proceeds from issuance
of stock 12,749 12,749
Purchase of treasury
stock (7,445) (7,445)
Other 1,173 1,173
Payments to preferred and
common shareholders (1,124) (1,124)
---------- ---------- ---------- ----------- ----------
Net cash provided by
(used in) financing
activities (3,786) 85,573 (31,541) -- 50,246
Increase (decrease) in cash
and cash equivalents 6,794 (36,776) (3,595) (33,577)
Cash and cash equivalents
at beginning of period 11,489 45,728 19,738 76,955
---------- ---------- ---------- ----------- ----------
Cash and cash equivalents
at end of period $18,283 $8,952 $16,143 -- $43,378
========== ========== ========== =========== ==========
</TABLE>
<TABLE>
SAKS INCORPORATED
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEETS AT JANUARY 31, 1998
(Dollars In Thousands)
Non-
Saks Guarantor Guarantor
Incorp- Subsid- Subsid- Elimin- Consol-
orated iaries iaries ations idated
ASSETS --------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Current Assets
Cash and cash equiv-
alents $15,405 ($4,594) $40,053 $50,864
Trade accounts receivable 113 273 411,823 412,209
Merchandise inventories 171,212 1,073,470 1,244,682
Deferred income taxes 6,797 58,570 6,447 71,814
Intercompany borrowings 30,715 90,293 ($121,008)
Other current assets 6,777 98,292 6,552 111,621
---------- ---------- ---------- ----------- ----------
Total Current Assets 231,019 1,316,304 464,875 (121,008) 1,891,190
Property and Equipment,
net 186,266 953,642 586,071 1,725,979
Goodwill and Intangibles,
net 7,340 319,967 327,307
Other Assets 2,297 39,731 25,901 67,929
Deferred Income Taxes (8,683) 266,531 257,848
Investment in and Advances
to Subsidiaries 1,959,326 1,352,541 (3,311,867)
---------- ---------- ---------- ----------- ----------
Total Assets $2,377,565 $4,248,716 $1,076,847 ($3,432,875) $4,270,253
========== ========== ========== =========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Trade accounts payable $39,713 $294,081 $333,794
Accrued expenses and
other current liabil-
ities 45,563 380,800 $27,671 454,034
Intercompany borrowings 121,008 ($121,008)
Current portion of long-
term debt 452 12,606 13,058
---------- ---------- ---------- ----------- ----------
Total Current Liabilities 85,728 687,487 148,679 (121,008) 800,886
Senior Debt 336,545 331,420 425,841 1,093,806
Other Long-Term Liabilities 10,763 131,476 1,829 144,068
Subordinated Debt 286,964 286,964
Investment by and Advances
from Parent 2,811,369 500,498 (3,311,867)
Shareholders' Equity 1,944,529 1,944,529
---------- ---------- ---------- ----------- ----------
Total Liabilities and
Shareholders' Equity $2,377,565 $4,248,716 $1,076,847 ($3,432,875) $4,270,253
========== ========== ========== =========== ==========
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
Prior year balance sheet information below has been restated to
reflect the September 17, 1998 and January 31, 1998 mergers with SFA
and Carson's respectively, which were accounted for as poolings-of-
interests.
Accounts receivable, inventory, accounts payable, and senior debt
balances fluctuate throughout the year due to the seasonal nature
of the retail industry.
The August 1, 1998 trade accounts receivable balance decreased from
the January 31, 1998 and August 2, 1997 balances due to selling a
higher percentage of the Company's receivables through its
securitization programs (primarily related to Carson's receivables
which were not previously securitized). The proceeds of these
additional sales of receivables were used to reduce senior debt
balances.
August 1, 1998 merchandise inventory and property and equipment
balances increased over January 31, 1998 and August 2, 1997
balances primarily due to new store locations during 1997 and 1998,
the acquisition of Brody's in March 1998, combined with the
intensification of inventories at certain stores, particularly at
the Parisian and Herberger's divisions.
August 1, 1998 subordinated debt decreased from the balance at
August 2, 1997 due to the conversion of approximately $86 million
of convertible subordinated debentures into Common Stock and the
retirement of approximately $128 million of additional debentures.
August 1, 1998 equity increased over the balance at August 2, 1997
primarily due to net earnings combined with the aforementioned
conversion of convertible subordinated debentures into common stock
and an increase in outstanding shares of common stock.
In connection with the SFA merger, the Company initiated a series
of refinancing activities designed to reduce the weighted average
cost of debt, provide appropriate debt maturities, increase the
overall liquidity and ensure a proper capital structure. The
refinancing activities included: (1) on September 9, 1998 the
Company completed a tender offer for its $125 million 8.125% senior
unsecured notes utilizing proceeds from the revolving credit
agreements; (2) during September 1998 SFA repurchased $ 65 million
of outstanding REMIC mortgage certificates using proceeds from the
SFA revolving credit agreement; (3) on September 17, 1998 the
Company replaced the existing revolving credit facility with $1.5
billion in new revolving credit facilities (the New Facilities)
which are unsecured, are scheduled to expire in September 2003, and
will bear interest at LIBOR based variable rates; and, (4) on
September 17, 1998 advances from the New Facilities were used to
repay all outstanding indebtedness under the SFA credit facility
and the SFA credit facility was terminated. On September 17, 1998,
the Company also terminated an operating lease arrangement which
resulted in the purchase of properties valued at approximately $30
million. The Company utilized proceeds from its New Facilities to
fund the termination.
The SFA convertible subordinated debentures contain certain
restrictive covenants including the extension of a put option in
the event of a change in control of SFA. The Company believes that
the merger with SFA may constitute a change in control as defined
in the debenture and therefore the holders of the convertible
subordinated debentures would have a put option back to the
Company. The Company's interpretation of the debenture is that any
convertible notes which are put to the Company may be redeemed at
the Company's option in the form of cash or common stock of the
Company. If the holders exercise the put option, the Company may
use the proceeds from the New Facilities to fund the redemption and
then may subsequently seek replacement long-term financing.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Prior year income statement information below has been restated to
reflect the September 17, 1998 and January 31, 1998 mergers with
SFA and Carson's respectively, which were accounted for as a
poolings-of-interests.
The following table shows for the periods indicated, certain items
from the Company's Supplemental Condensed Consolidated Statements
of Income expressed as percentages of net sales
(numbers may not total due to rounding).
Three Months Ended Six Months Ended
----------------- ----------------
8/1/98 8/2/97 8/1/98 8/2/97
------ ------ ------ -------
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of Sales 65.3 66.1 65.3 65.7
----- ----- ----- -----
Gross Margin 34.7 33.9 34.7 34.3
Selling, general &
administrative expenses 22.7 22.2 21.8 21.8
Other operating expenses 8.9 8.4 8.5 8.1
Store pre-opening costs 0.0 0.2 0.1 0.2
Merger, restructuring costs 0.3 0.1 0.2 0.1
Loss on long-lived assets 0.1 0.0 0.1 0.0
Year 2000 expenses 0.2 0.3 0.2 0.2
ESOP expenses 0.0 0.1 0.0 0.1
---- ---- ---- ----
Operating Income 2.4 2.5 3.8 3.7
Other income (expense):
Interest Expense (1.9) (2.4) (1.8) (2.3)
Other income, net 0.0 0.0 0.0 0.0
---- ---- ---- ----
Income before provision
for income taxes 0.5 0.1 2.0 1.4
Provision for income
taxes 0.3 0.5 0.9 0.6
---- ---- ---- ----
Net income (loss) before
extraordinary loss 0.2 (0.4) 1.1 0.8
Extraordinary loss, net
of tax 0.0 0.1 0.0 0.2
------ ----- ------ ------
NET INCOME (LOSS) 0.2% (0.5%) 1.1% 0.6%
For the second quarter ended August 1, 1998, total Company sales
were $1.28 billion, an 8% increase over $1.19 billion in the prior
year. For the six months ended August 1, 1998, total Company sales
were $2.70 billion, an 8% increase over $2.49 billion in the prior
year. The sales increases for the second quarter and six months
were primarily attributable to a comparable store sales growth of
4% for both periods, and additional sales from new stores opened in
1997 and 1998.
For the second quarter ended August 1, 1998, gross margin
percentage increased 80 basis points over the prior year. This
increase was achieved through improved execution of merchandising
strategies, the realization of benefits related to increased
purchasing scale, shifts in the merchandise mix of select stores,
combined with the comparison against a lower than normal margin
rate in the prior year quarter due to excess prior year markdowns
associated with conforming changes to inventory policies related to
the Company's merger activities. For the six months ended August
1, 1998, gross margin percentage increased 40 basis points over
the prior year. The increase was primarily due to the aforementioned
merchandising strategies and purchasing scale improvements.
Selling, general, and administrative (SG & A) expenses increased as
a percentage of net sales for the second quarter ended August 1,
1998 by 50 basis points. The increase was primarily due to
increased advertising and payroll costs, and expenses associated
with exiting a Saks Fifth Avenue store in Houston, Texas offset by
increased leverage from sales growth, cost reduction efforts and
efficiencies. For the six months ended August 1, 1998, S G & A
expense was consistent with the prior year as the benefits of sales
leverage, cost reductions and efficiency improvements were offset
by the increased payroll and store exit costs.
Other operating expenses, which consist of rents, depreciation, and
taxes other than income taxes, increased by 50 and 40 basis points
for the second quarter and six months ended August 1, 1998,
respectively, over last year. These increases were largely
attributable to the effect of new store openings and the capital
expenditures related to store remodels and corporate infrastructure
enhancements, which increased rent and depreciation.
In conjunction with the Company's business combinations with
Younkers, Parisian, Herberger's, Carson's and Brody's, the Company
incurred certain integration charges in each period presented. For
the quarters ended August 1, 1998 and August 2, 1997, these charges
totaled $4.0 million, or 0.3% of net sales, and $1.6 million, or
0.1% of net sales, respectively. For the six month periods ended
August 1, 1998 and August 2, 1997, these charges totaled $6.0
million, or 0.2% of net sales, and $3.1 million, or 0.1% of net
sales, respectively.
The Company has completed its assessment of the Year 2000 effect on
the Company's systems. Necessary systems modifications are
currently underway and are scheduled for completion by spring 1999.
For the quarters ended August 1, 1998 and August 2, 1997, Year 2000
expenses totaled $2.6 million, or 0.2% of net sales and $3.7
million, or 0.3% of net sales, respectively. For the six month
periods ended August 1, 1998 and August 2, 1997, Year 2000 expenses
totaled $4.1 million, or 0.2% of net sales, and $4.4 million, or
0.2% of net sales, respectively. Management anticipates that
additional Year 2000 charges will total approximately $4.9 million
for the last two quarters of 1998 and $3.0 million for 1999.
For the quarter and six months ended August 2, 1997, the Company
incurred expenses of $.8 million, or 0.1% of net sales, and $1.5
million, or 0.1% of net sales, respectively, related to the
Company's Employee Stock Ownership Plan (the "ESOP") maintained at
Herberger's. The ESOP was terminated in December 1997.
Interest expense decreased as a percentage of sales for the quarter
and six months ended August 1, 1998 by 50 basis points. The
decrease was due to improved cash flows from operations, decreased
levels of indebtedness due in part to certain of the Company's
capital restructuring efforts during 1997 and overall lower
interest rates.
Net income for the quarter ended August 1, 1998 totaled $2.6
million, or $.02 per diluted share, compared to a net loss of $5.9
million (after an extraordinary charge of $1.1 million net of tax
or $.01 per diluted share), or $.04 per diluted share, for the
quarter ended August 2, 1997. Net income for the six months ended
August 1, 1998 totaled $30.8 million, or $.21 per diluted share,
compared to $16.0 million (after and extraordinary charge of $4.5
million after tax, or $.03 per diluted share), or $.12 per diluted
share in the prior year. The increase in earnings over the prior
year primarily was due to improved gross margin performance,
leverage on operating expenses, increased finance charge income,
and lower financing costs.
These supplemental condensed consolidating financial statements
contain "forward-looking" statements within the meaning of the
federal securities laws. Forward-looking information in these
supplemental condensed consolidating financial statements is
premised on many factors, some of which are outlined below. Actual
consolidated results might differ materially from projected
forward-looking information if there are any material changes in
management's assumptions.
This forward-looking information and statements are based on a
series of projections and estimates and involve certain risks and
uncertainties. Potential risks and uncertainties include such
factors as the level of consumer spending for apparel and other
merchandise carried by the Company; the competitive pricing
environment within the department and specialty store industries;
the effectiveness of planned advertising, marketing, and
promotional campaigns; appropriate inventory management;
realization of planned synergies; effective cost containment; and
solution of year 2000 systems issues by the Company and its
suppliers. For additional information regarding these and other
risk factors, please refer to the Company's public filings with the
Securities and Exchange Commission, which may be accessed via EDGAR
through the internet at www.sec.gov.
AMENDED AND RESTATED CHARTER
OF
SAKS INCORPORATED
(As amended effective September 17, 1998)
ARTICLE I
Name
The name of the Corporation is SAKS INCORPORATED.
ARTICLE II
Duration
The duration of the Corporation is perpetual.
ARTICLE III
Address
The address of the principal office of the Corporation is 750
Lakeshore Parkway, Birmingham, Alabama 35211.
ARTICLE IV
For Profit
The corporation is for profit.
ARTICLE V
Purpose
The purpose or purposes for which the Corporation are
organized are:
(a) To purchase, rent, lease, construct or otherwise
acquire adequate facilities and to operate therein general
department stores and related services enterprises.
(b) To enter into partnerships and/or joint ventures
with individuals, partnerships and/or corporations for the
purpose of transacting and carrying out the business which the
Corporation is authorized to conduct.
(c) To borrow or raise money for any of the purposes of
the Corporation and to issue, make, and/or draw notes, drafts,
warrants, bonds, debentures and/or other negotiable or non-
negotiable instruments and to secure the payment thereof by
mortgage, pledge, conveyance, deed of trust and/or other
instrument upon any property of the Corporation.
(d) To perform such other acts and things as may be
necessary and/or incident to any of the purposes aforesaid.
(e) To engage in any other lawful business permitted
under the Tennessee General Corporation Act.
ARTICLE VI
Shares
The maximum number of shares of all classes of stock which the
Corporation shall have the authority to issue is 510,000,000 shares
consisting of (a) 10,000,000 shares of Series Preferred Stock, with
a par value of $1.00 per share (herein called the "Series Preferred
Stock"), and (b)500,000,000 shares of Common Stock, with a par
value of $.10 per share (herein called the "Common Stock").
The following is a statement of the powers, preferences and
rights, and the qualifications, limitations or restrictions
thereof, in respect to each class of stock of the Corporation.
Section 1. Series Preferred Stock.
1A. Conditions of Issuance. Series Preferred Stock may
be issued from time to time and in such amounts and for such
consideration as may be determined by the Board of Directors
of the Corporation ("Board"). The designation and relative
rights and preferences of each series, except to the extent
such designations and relative rights and preferences may be
required by Tennessee law or this Charter, shall be such as
are fixed by the Board and stated in a resolution or
resolutions adopted by the Board authorizing such series
(herein called the "Series Resolution"). A Series Resolution
authorizing any series shall fix:
(i) The designation of the series which may be by
distinguishing number, letter or title;
(ii) The number of shares of such series;
(iii) The dividend rate or rates of such shares,
the date at which dividends, if declared, shall be
payable, and whether or not such dividends are to be
cumulative, in which case such Series Resolution shall
state the date or dates from which dividends shall be
cumulative;
(iv) The amounts payable on shares of such series in
the event of voluntary or involuntary liquidation,
dissolution or winding up;
(v) The redemption rights and price or prices, if
any, for the shares of such series;
(vi) The terms and amount of any sinking fund or
analogous fund providing for the purchase or redemption
of the shares of such series, if any;
(vii) The voting rights, if any, granted to the
holders of the shares of such series in addition to those
required by Tennessee law or this Charter;
(viii) Whether the shares of such series shall be
convertible into shares of the Corporation's Common Stock
or any other class of the Corporation's capital stock,
and if convertible, the conversion price or prices, any
adjustment thereof and any other terms and conditions
upon which such conversion shall be made; and
(ix) Any other rights, preferences, restrictions or
conditions relative to the shares of such series as may
be permitted by Tennessee law or this Charter.
1B. Restrictions. In no event, so long as any Series
Preferred Stock shall remain outstanding, shall any dividend
whatsoever be declared or paid upon, nor shall any
distribution be made upon, the Common Stock, other than a
dividend or distribution payable in shares of such Common
Stock, nor (without the written consent of such number of the
holders of the outstanding Series Preferred Stock as shall
have been specified in the Series Resolution authorizing the
issuance of such outstanding Series Preferred Stock) shall any
shares of Common Stock be purchased or redeemed by the
Corporation, nor shall any monies be paid to or made available
for a sinking fund for the purchase or redemption of any
Common Stock, unless in each instance full dividends on all
outstanding shares of the Series Preferred Stock for all past
dividend periods shall have been paid and the full dividend on
all outstanding shares of the Series Preferred Stock for the
current dividend period shall have been paid or declared and
sufficient funds for the payment thereof set apart and any
arrears in the mandatory redemption of the Series Preferred
Stock shall have been made good.
1C. Priority. Series Preferred Stock, with respect to
both dividends and distribution of assets on liquidation,
dissolution or winding up, shall rank prior to the Common
Stock.
1D. Voting Rights. Holders of Series Preferred Stock
shall have no right to vote for the election of directors of
the Corporation or on any other matter unless a vote of such
class is required by Tennessee law, this Charter or a Series
Resolution.
1E. Filing of Amendments. The Board shall adopt
amendments to this Charter fixing, with respect to each series
of Series Preferred Stock, the matters described in Paragraph
1A of this Section 1.
1F. Series C Junior Preferred Stock. A series of
authorized preferred stock is hereby established having a par
value of $1.00 per share, which series shall be designated as
"Series C Junior Preferred Stock" (the "Series C Junior
Preferred Stock"), shall consist of 2,500,000 shares and shall
have the following voting powers, preferences and relative,
participating, optional and other special rights, and the
qualifications, limitations and restrictions thereof as
follows:
(i) Dividends and Distributions.
(a) Subject to the rights of the holders of
any shares of any series of Preferred Stock (or any
similar stock) ranking prior and superior to the Series
C Junior Preferred Stock with respect to dividends, the
holders of shares of Series C Junior Preferred Stock, in
preference to the holders of Common Stock of the
Corporation, and of any other junior stock, shall be
entitled to receive, when, as and if declared by the
Board out of funds legally available for the purpose,
quarterly dividends payable in cash on the first day of
March, June, September and December in each year (each
such date being referred to herein as a "Quarterly
Dividend Payment Date"), commencing on the first
Quarterly Dividend Payment Date after the first issuance
of a share or fraction of a share of Series C Junior
Preferred Stock in an amount per share (rounded to the
nearest cent) equal to the greater of (a) $1.00 or (b)
subject to the provision for adjustment hereinafter set
forth, 100 times the aggregate per share amount of all
cash dividends, and 100 times the aggregate per share
amount (payable in kind) of all non-cash dividends or
other distributions, other than a dividend payable in
shares of Common Stock or a subdivision of the
outstanding shares of Common Stock (by reclassification
or otherwise), declared on the Common Stock since the
immediately preceding Quarterly Dividend Payment Date or,
with respect to the first Quarterly Dividend Payment
Date, since the first issuance of any share or fraction
of a share of Series C Junior Preferred Stock. In the
event the Corporation shall at any time declare or pay
any dividend on the Common Stock payable in shares of
Common Stock, or effect a subdivision or combination or
consolidation of the outstanding shares of Common Stock
(by reclassification or otherwise than by payment of a
dividend in shares of Common Stock) into a greater or
lesser number of shares of Common Stock, then in each
such case the amount to which holders of shares of Series
C Junior Preferred Stock were entitled immediately prior
to such event under clause (b) of the preceding sentence
shall be adjusted by multiplying such amount by a
fraction, the numerator of which is the number of shares
of Common Stock outstanding immediately after such event
and the denominator of which is the number of shares of
Common Stock that were outstanding immediately prior to
such event.
(b) The Corporation shall declare a dividend
or distribution on the Series C Junior Preferred Stock as
provided in paragraph (a) of this Section immediately
after it declares a dividend or distribution on the
Common Stock (other than a dividend payable in shares of
Common Stock); provided that, in the event no dividend or
distribution shall have been declared on the Common Stock
during the period between any Quarterly Dividend Payment
Date and the next subsequent Quarterly Dividend Payment
Date, a dividend of $1.00 per share on the Series C
Junior Preferred stock shall nevertheless be payable on
such subsequent Quarterly Dividend Payment Date.
(c) Dividends shall begin to accrue and be
cumulative on outstanding shares of Series C Junior
Preferred Stock from the Quarterly Dividend Payment Date
next preceding the date of issue of such shares, unless
the date of issue of such shares is prior to the record
date for the first Quarterly Dividend Payment Date, in
which case, dividends on such shares shall begin to
accrue from the date of issue of such shares, or unless
the date of issue is a Quarterly Dividend Payment Date or
is a date after the record date for the determination of
holders of shares of Series C Junior Preferred Stock
entitled to receive a quarterly dividend and before such
Quarterly Dividend Payment Date, in either of which
events such dividends shall begin to accrue and be
cumulative from such Quarterly Dividend Payment Date.
Accrued but unpaid dividends shall not bear interest.
Dividends paid on the shares of Series C Junior Preferred
Stock in an amount less than the total amount of such
dividends at the time accrued and payable on such shares
shall be allocated pro rata on a share-by-share basis
among all such shares at the time outstanding. The Board
may fix a record date for the determination of holders of
shares of Series C Junior Preferred Stock entitled to
receive payment of a dividend or distribution declared
thereon, which record date shall be not more than sixty
(60) days prior to the date fixed for the payment
thereof.
(ii) Voting Rights. The holders of shares of Series
C Junior Preferred Stock shall have the following voting
rights:
(a) Subject to the provision for adjustment
hereinafter set forth, each share of Series C Junior
Preferred Stock shall entitle the holder thereof to 100
votes on all matters submitted to a vote of the
shareholders of the Corporation. In the event the
Corporation shall at any time declare or pay any dividend
on the Common Stock payable in shares of Common Stock, or
effect a subdivision or combination or consolidation of
the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a
dividend in shares of Common Stock) into a greater or
lesser number of shares of Common Stock, then in each
such case the number of votes per share to which holders
of shares of Series C Junior Preferred Stock were
entitled immediately prior to such event shall be
adjusted by multiplying such number by a fraction, the
numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common
Stock that were outstanding immediately prior to such
event.
(b) Except as otherwise provided herein, in
any other Articles of Amendment creating a series of
Preferred Stock or any similar stock, or Bylaw, the
holders of shares of Series C Junior Preferred Stock and
the holders of shares of Common Stock and any other
capital stock of the Corporation having general voting
rights shall vote together as one class on all matters
submitted to a vote of stockholders of the Corporation.
(c) Except as set forth herein, or as
otherwise provided by law, holders of Series C Junior
Preferred Stock shall have no special voting rights and
their consent shall not be required (except to the extent
they are entitled to vote with holders of Common Stock as
set forth herein) for taking any corporate action.
(iii) Certain Restrictions.
(a) Whenever quarterly dividends or other
dividends or distributions payable on the Series C Junior
Preferred Stock as provided in Section 1 are in arrears,
thereafter and until all accrued and unpaid dividends and
distributions, whether or not declared, on shares of
Series C Junior Preferred Stock outstanding shall have
been paid in full, the Corporation shall not:
(1) declare or pay dividends, or make any
other distributions, on any shares of stock ranking
junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series C Junior
Preferred Stock;
(2) declare or pay dividends, or make any
other distributions, on any shares of stock ranking
on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the
Series C Junior Preferred Stock, except dividends
paid ratably on the Series C Junior Preferred Stock
and all such parity stock on which dividends are
payable or in arrears in proportion to the total
amounts to which the holders of all such shares are
then entitled;
(3) redeem or purchase or otherwise acquire
for consideration shares of any stock ranking
junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series C Junior
Preferred Stock, provided that the Corporation may
at any time redeem, purchase or otherwise acquire
shares of any such junior stock in exchange for
shares of any stock of the Corporation ranking
junior (as to dividends and upon dissolution,
liquidation and winding up) to the Series C Junior
Preferred Stock; or
(4) redeem or purchase or otherwise acquire
for consideration any shares of Series C Junior
Preferred Stock, or any shares of stock ranking on
a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the
Series C Junior Preferred Stock, except in
accordance with a purchase offer made in writing or
by publication (as determined by the Board) to all
holders of such shares upon such terms as the
Board, after consideration of the respective annual
dividend rates and other relative rights and
preferences of the respective series and classes,
shall determine in good faith will result in fair
and equitable treatment among the respective series
or classes.
(b) The Corporation shall not permit any
subsidiary of the Corporation to purchase or otherwise
acquire for consideration any shares of stock of the
Company unless the Corporation could, under paragraph (a)
of this Section 1F(iii), purchase or otherwise acquire
such shares at such time and in such manner.
(iv) Reacquired Shares. Any shares of Series C
Junior Preferred Stock purchased or otherwise acquired by
the Company in any manner whatsoever shall be retired and
canceled promptly after the acquisition thereof. All
such shares shall upon their cancellation become
authorized but unissued shares of Preferred Stock and may
be reissued as part of a new series of Preferred Stock
subject to the conditions and restrictions on issuance
set forth herein, in the Charter, or in any other
Articles of Amendment creating a series of Preferred
Stock or any similar stock or otherwise required by law.
(v) Liquidation Dissolution or Winding Up. Upon
any liquidation, dissolution or winding up of the
Corporation, no distribution shall be made (1) to the
holders of shares of stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up)
to the Series C Junior Preferred Stock unless, prior
thereto, the holders of shares of Series C Junior
Preferred Stock shall have received $1.00 per share, plus
an amount equal to accrued and unpaid dividends and
distributions thereon, whether or not declared, to the
date of such payment, provided that the holders of shares
of Series C Junior Preferred Stock shall be entitled to
receive an aggregate amount per share, subject to the
provision for adjustment hereinafter set forth, equal to
100 times the aggregate amount to be distributed per
share to holders of shares of Common Stock, or (2) to the
holders of shares of stock ranking on a parity (either as
to dividends or upon liquidation, dissolution or winding
up) with the Series C Junior Preferred Stock except
distributions made ratably on the Series C Junior
Preferred Stock and all such parity stock in proportion
to the total amounts to which the holders of all such
shares are entitled upon such liquidation, dissolution or
winding up. In the event the Corporation shall, at any
time, declare or pay any dividend on the Common Stock
payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the
outstanding shares of Common Stock (by reclassification
or otherwise than by payment of a dividend in shares of
Common Stock) into a greater or lesser number of shares
of Common Stock, then in each such case the aggregate
amount to which holders of shares of Series C Junior
Preferred Stock were entitled immediately prior to such
event under the proviso in clause (1) of the preceding
sentence shall be adjusted by multiplying such amount by
a fraction, the numerator of which is the number of
shares of Common Stock outstanding immediately after such
event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately
prior to such event.
(vi) Consolidation, Merger, etc. In case the
Corporation shall enter into any consolidation, merger,
combination or other transaction in which the shares of
Common Stock are exchanged for or changed into other
stock or securities, cash and/or any other property, then
in any such case each share of Series C Junior Preferred
Stock shall at the same time be similarly exchanged or
changed into an amount per share, subject to the
provision for adjustment hereinafter set forth, equal to
100 times the aggregate amount of stock, securities, cash
and/or any other property (payable in kind), as the case
may be, into which or for which each share of Common
Stock is changed or exchanged. In the event the
Corporation shall at any time declare or pay any dividend
on the Common Stock payable in shares of Common Stock, or
effect a subdivision or combination or consolidation of
the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a
dividend in shares of Common Stock) into a greater or
lesser number of shares of Common Stock, then in each
such case the amount set forth in the preceding sentence
with respect to the exchange or change of shares of
Series C Junior Preferred Stock shall be adjusted by
multiplying such amount by a fraction, the numerator of
which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which
is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(vii) No Redemption. The shares of Series C
Junior Preferred Stock shall not be redeemable.
(viii) Rank. The Series C Junior Preferred Stock
shall rank, with respect to the payment of dividends and
the distribution of assets, junior to all series of any
other class of the Corporation's Preferred Stock.
(ix) Amendment. The Charter of the Corporation
shall not be amended in any manner which would materially
alter or change the powers, preferences or special rights
of the Series C Junior Preferred Stock so as to affect
them adversely without the affirmative vote of the
holders of at least a majority of the outstanding shares
of Series C Junior Preferred Stock, voting together as a
single class.
Section 2. Common Stock. All shares of Common Stock shall
be identical and shall entitle the holders thereof to the same
rights and privileges.
2A. Dividends. When and as dividends are declared upon
the Common Stock, whether payable in cash, in property or in
shares of stock of the Corporation, the holders of the Common
Stock shall be entitled to share equally, share per share, in
such dividends.
2B. Voting Rights. Except as otherwise provided by law
or this Charter, the holders of Common Stock shall have equal
voting rights on the basis of one vote per share.
2C. Issuance. Shares of Common Stock may be issued from
time to time as the Board shall determine and on such terms
and for such consideration as may be fixed by the Board.
Section 3. Preemptive Rights. No holder of shares of the
Corporation of any class now or hereafter authorized shall, as such
holder, have any preferential or preemptive right to subscribe for,
purchase or receive any shares of the Corporation of any class, now
or hereafter authorizing, or any options or warrants for such
shares, or any rights to subscribe to or purchase such shares or
any securities convertible into or exchangeable for such shares,
which may at any time be issued, sold or offered for sale by the
Corporation. The Board shall have the right to issue the
authorized and treasury shares of the Corporation at such time and
upon such terms and conditions and for such consideration as the
Board shall determine.
ARTICLE VII
Commencement of Business
The Corporation will not commence business until consideration
of an amount not less than $1,000.00 has been received for the
issuance of shares.
ARTICLE VIII
Shareholders
Any action required or permitted to be taken by the
shareholders of the Corporation must be effected at a duly called
annual or special meeting of such holders and may not be effected
by any consent in writing by such holders. Notwithstanding
anything in this Charter to the contrary, the affirmative vote of
the holders of at least 80% of the voting power of all shares of
the Corporation entitled to vote generally in the election of
Directors, voting together as a class, shall be required to alter,
amend, adopt any provisions inconsistent with or repeal this
Article VIII.
ARTICLE IX
Directors
The number of directors and the removal of directors shall be
determined as follows:
Section 1. Number of Directors. The affairs of this
Corporation shall be managed by a Board of up to eighteen (18)
directors.
Effective as of the annual meeting of shareholders in 1997,
the Board shall be divided into three classes, designated as Class
I, Class II, and Class III, as nearly equal in number as possible.
The initial term of office of Class I shall expire at the annual
meeting of shareholders in 1998, that of Class II shall expire at
the annual meeting in 1999, and that of Class III shall expire at
the annual meeting in 2000, and in all cases as to each director
until his or her successor shall be elected and shall qualify, or
until his or her earlier resignation, removal from office, death,
or incapacity.
Subject to the foregoing, at each annual meeting of
shareholders the successors to the class of directors whose term
shall then expire shall be elected to hold office for a term
expiring at the third succeeding annual meeting and until their
successors shall be elected and qualified. Vacancies on the Board,
for any reason, and newly created directorships resulting from any
increase in the authorized number of directors may be filled by a
vote of the majority of the directors then in office, although less
than a quorum, or by a sole remaining director.
If the number of directors is changed, the Board shall
determine the class or classes to which the increased or decreased
number of directors shall be apportioned; provided that the
directors in each class shall be as nearly equal in number as
possible. No decrease in the number of directors shall have the
effect of shortening the term of any incumbent director.
Notwithstanding any other provisions of this Charter or the
Bylaws of the Corporation (and notwithstanding that a lesser
percentage may be specified by law, this Charter, or the Bylaws of
the Corporation), the affirmative vote of the holders of 80% or
more of the voting power of the shares of the then outstanding
Voting Stock, voting together as a single class, shall be required
to amend or repeal, or adopt any provisions inconsistent with, this
Article IX, Section 1 of this Charter.
Section 2. Removal of Directors. Directors may be removed
by shareholders only for cause as defined in the Tennessee General
Corporation Act.
ARTICLE X
Shareholder Approval
The holders of shares shall have the right to approve certain
business combinations as follows:
Section 1. Vote Required for Certain Business
Combinations.
1A. Higher Vote for Certain Business Combinations. In
addition to any affirmative vote required by law or this
Charter, and except as otherwise expressly provided in Section
2 of this Article X:
(i) any merger or consolidation of the Corporation
or any Subsidiary (as hereinafter defined) with (a) any
Interested Shareholder (as hereinafter defined) or (b)
any other corporation (whether or not itself an
Interested Shareholder) which is, or after such merger or
consolidation would be, an Affiliate (as hereinafter
defined) of an Interested Shareholder; or
(ii) any sale, lease, exchange, mortgage, pledge,
transfer or other disposition (in one transaction or a
series of transactions) to or with any Interested
Shareholder or any Affiliate of any Interested
Shareholder of any assets of the Corporation or any
Subsidiary having an aggregate fair market value (as
hereinafter defined) of $1,000,000 or more; or
(iii) the issuance or transfer by the
Corporation or any Subsidiary (in one transaction or a
series of transactions) of any securities of the
Corporation or any Subsidiary to any Interested
Shareholder or any Affiliate of any Interested
Shareholder in exchange for cash, securities or other
property (or a combination thereof) having an aggregate
fair market value of $1,000,000 or more; or
(iv) the adoption of any plan or proposal for the
liquidation or dissolution of the Corporation proposed by
or on behalf of an Interested Shareholder or any
Affiliate of any Interested Shareholder; or
(v) any reclassification of securities (including
any reverse stock split), or recapitalization of the
Corporation, or any merger or consolidation of the
Corporation with any of its Subsidiaries or any other
transaction (whether or not with or into or otherwise
involving an Interested Shareholder) which has the
effect, directly or indirectly, of increasing the
proportionate share of the outstanding shares of any
class of equity or convertible securities of the
Corporation or any Subsidiary which is directly or
indirectly owned by any Interested Shareholder or any
Affiliate of any Interested Shareholder; or
(vi) any agreement, contract or other arrangement
providing directly or indirectly for the foregoing;
shall require the affirmative vote of the holders of at least
80% of the voting power of the then outstanding shares of
capital stock of the Corporation entitled to vote generally in
the election of directors (the "Voting Stock"), voting
together as a single class. Such affirmative vote shall be
required notwithstanding the fact that no vote may be
required, or that a lesser percentage may be specified, by law
or in any agreement with any national securities exchange or
otherwise.
1B. Definition of "Business Combination". The term
"Business Combination" as used in this Article X shall mean
any transaction which is referred to in any one or more of
clauses (i) through (vi) of paragraph 1A of this Section 1.
Section 2. When Higher Vote is Not Required. The
provisions of this Article X shall not be applicable to any
particular Business Combination, and such Business Combination
shall require only such affirmative vote as is required by law and
any other provision of this Charter, if all of the conditions
specified in either of the following paragraphs 2A or 2B are met:
2A. Approval by Continuing Directors. The Business
Combination shall have been approved by a majority of the
Continuing Directors (as hereinafter defined).
2B. Price and Procedure Requirements. All of the
following conditions shall have been met:
(i) The aggregate amount of the cash and the Fair
Market Value as of the date of the consummation of the
Business Combination of consideration other than cash to
be received per share by holders of Common Stock in such
Business Combination shall be at least equal to the
highest of the following:
(a) (if applicable) the highest per share
price (including any brokerage commissions,
transfer taxes and soliciting dealers' fees) paid
by the Interested Shareholder for any shares of
Common Stock acquired by it (1) within the two-year
period immediately prior to the first public
announcement of the proposal of the Business
Combination (the "Announcement Date") or (2) in the
transaction in which it became an Interested
Shareholder, whichever is higher; or
(b) the Fair Market Value per Share of Common
Stock on the Announcement Date or on the date on
which the Interested Shareholder became an
Interested Shareholder (such latter date is
referred to in this Article X as the "Determination
Date"), whichever is higher; or
(c) (if applicable) the price per share equal
to the Fair Market Value per share of Common Stock
determined pursuant to paragraph 2B(i)(b) above,
multiplied by the ratio of (1) the highest per
share price (including any brokerage commissions,
transfer taxes and soliciting dealers' fees) paid
by the Interested Shareholder for any shares of
Common Stock acquired by it within the two-year
period immediately prior to the Announcement Date
to (2) the Fair Market Value per share of Common
Stock on the first day in such two-year period upon
which the Interested Shareholder acquired any
shares of Common Stock.
(ii) The aggregate amount of the cash and the Fair
Market Value as of the date of the consummation of the
Business Combination of consideration other than cash to
be received per share by holders of shares of any other
class of outstanding Voting Stock shall be at least equal
to the highest of the following (it being intended that
the requirement of this paragraph 2B(ii) shall be
required to be met with respect to every class of
outstanding Voting Stock, whether or not the Interested
Shareholder has previously acquired any shares of a
particular class of Voting Stock).
(iii) The consideration to be received by
holders of a particular class of outstanding Voting Stock
(including Common Stock) shall be in cash or in the same
form as the Interested Shareholder had previously paid
for shares of such class of Voting Stock. If the
Interested Shareholder had previously paid for shares of
such class of Voting Stock with varying forms of
consideration, the form of consideration for such class
of Voting Stock shall be either cash or the form used to
acquire the largest number of shares of such class of
Voting Stock previously acquired by it.
(iv) After such Interested Shareholder has become an
Interested Shareholder and prior to the consummation of
such Business Combination: (a) except as approved by a
majority of the Continuing Directors, there shall have
been no failure to declare and pay at the regular date
therefore any full quarterly dividends (whether or not
cumulative) on any outstanding Preferred Stock; (b) there
shall have been (1) no reduction in the annual rate of
dividends paid on the Common Stock (except as necessary
to reflect any subdivision of the Common Stock), except
as approved by a majority of the Continuing Directors,
and (2) an increase in such annual rate of dividends as
necessary to reflect any reclassification (including any
reverse stock split), recapitalization, reorganization or
any similar transaction which has the effect of reducing
the number of outstanding shares of the Common Stock,
unless the failure to increase such annual rate is
approved by a majority of the Continuing Directors; and
(c) such Interested Shareholder shall have not become the
beneficial owner of any additional shares of Voting Stock
except as part of the transaction which results in such
Interested Shareholder becoming an Interested
Shareholder.
(v) After such Interested Shareholder has become an
Interested Shareholder, such Interested Shareholder shall
not have received the benefit, directly or indirectly
(except proportionately as a shareholder), of any loans,
advances, guarantees, pledges or other financial
assistance or any tax credits or other tax advantages
provided by the Corporation, whether in anticipation of,
or in connection with, such Business Combination or
otherwise.
(vi) A proxy or information statement describing the
proposed Business Combination and complying with the
requirements of the Securities Exchange Act of 1934 and
the rules and regulations thereunder (or any subsequent
provisions replacing such Act, rules or regulations)
shall be mailed to public shareholders of the Corporation
at least 30 days prior to the consummation of such
Business Combination (whether or not such proxy or
information statement is required to be mailed pursuant
to such Act or subsequent provisions).
Section 3. Certain Definitions. For the purposes of
this Article X:
3A. A "person" shall mean any individual, firm,
corporation or other entity.
3B. An "Interested Shareholder" shall mean any person
(other than the Corporation, any Subsidiary, RBM Acquisition
Company, the sole shareholder of the Corporation, or any
Shareholder of RBM Acquisition Company) who or which:
(i) is the beneficial owner, directly or
indirectly, of more than 10% of the voting power of the
outstanding Voting Stock; or
(ii) is an Affiliate of the Corporation and at any
time within the two-year period immediately prior to the
date in question was the beneficial owner, directly or
indirectly, of 10% or more of the voting power of the
then outstanding Voting Stock; or
(iii) is an assignee of or has otherwise
succeeded to any shares of Voting Stock which were at any
time within the two-year period immediately prior to the
date in question beneficially owned by any interested
Shareholder, if such assignment or succession shall have
occurred in the course of a transaction or series of
transactions not involving a public offering within the
meaning of the Securities Act of 1933.
For the purposes of determining whether a person is an
Interested Shareholder pursuant to paragraph 3B of this
Section 3, the number of shares of Voting Stock deemed to be
outstanding shall include shares deemed owned through
application of paragraph 3C of this Section 3, but shall not
include any other shares of Voting Stock which may be issuable
pursuant to any agreement, arrangement or understanding, or
upon exercise of conversion rights, warrants or options, or
otherwise.
3C. A person shall be a "beneficial owner" of any Voting
Stock:
(i) which such person or any of its Affiliates or
Associates (as hereinafter defined) beneficially owns,
directly or indirectly; or
(ii) which such person or any of its Affiliates or
Associates has (a) the right to acquire (whether such
right is exercisable immediately or only after the
passage of time), pursuant to any agreement, arrangement
or understanding or upon the exercise of conversion
rights, exchange rights, warrants or options, or
otherwise, or (b) the right to vote pursuant to any
agreement, arrangement or understanding; or
(iii) which are beneficially owned, directly or
indirectly, by any other person with which such person or
any of its Affiliates or Associates has any agreement,
arrangement or understanding for the purpose of
acquiring, holding, voting or disposing of any shares of
Voting Stock.
3D. "Affiliate" or "Associate" shall have the respective
meanings ascribed to such terms in Rule 12b-2 of the General
Rules and Regulations under the Securities Exchange Act of
1934, as in effect on June 1, 1985.
3E. "Subsidiary" means any corporation of which a
majority of any class of equity security is owned, directly or
indirectly, by the Corporation; provided, however, that for
the purposes of the definition of an Interested Shareholder
set forth in paragraph 3B of this Section 3, the term
"Subsidiary" shall mean only a corporation of which a majority
of each class of equity security is owned, directly or
indirectly, by the Corporation.
3F. "Continuing Director" means any member of the Board
who is unaffiliated with the Interested Shareholder and was a
member of the Board prior to the time that the Interested
Shareholder became an Interested Shareholder, and any
successor of a Continuing Director who is unaffiliated with
the Interested Shareholder and is recommended to succeed a
Continuing Director by a majority of Continuing Directors who
are then members of the Board.
3G. "Fair Market Value" means: (i) in the case of
stock, the highest closing sale price during the 30-day period
immediately preceding the date in question of a share of such
stock on the Composite Tape for New York Stock Exchange-Listed
Stocks, or, if such stock is not quoted on the Composite Tape,
on the New York Stock Exchange, on the principal United States
securities exchange registered under the Securities Exchange
Act of 1934 on which such stock is listed, or, if such stock
is not listed on any such exchange, the highest closing bid
quotation with respect to a share of such stock during the
30-day period preceding the date in question on the National
Association of Securities Dealers, Inc. Automated Quotations
System or any system then in use, or if no such quotations are
available, the fair market value on the date in question of a
share of such stock as determined by the Board in good faith;
and (ii) in the case of property other than cash or stock, the
fair market value of such property on the date in question as
determined by the Board in good faith.
3H. In the event of any Business Combination in which
the Corporation survives, the phrase "consideration other than
cash to be received" as used in subparagraphs 2B(i) and (ii)
of Section 2 of this Article X shall include the share of
Common Stock and/or the shares of any other class of
outstanding Voting Stock retained by the holders of such
shares.
Section 4. Power of Majority of Continuing Directors. A
majority of the Continuing Directors of the Corporation shall have
the power and duty to determine for the purposes of this Article X,
on the basis of information known to them after reasonable inquiry,
(1) whether a person is an Interested Shareholder, (2) the number
of shares of Voting Stock beneficially owned by any person, (3)
whether a person is an Affiliate or Associate of another, (4)
whether a class of Voting Stock is Institutional Voting Stock and
(5) whether the assets which are the subject of any Business
Combination have, or the consideration to be received for the
issuance or transfer of securities by the Corporation or any
Subsidiary in any Business Combination has, an aggregate Fair
Market Value of $1,000,000 or more.
Section 5. No Effect on Fiduciary Obligations of
Interested Shareholders. Nothing contained in this Article X shall
be construed to relieve any Interested Shareholder from any
fiduciary obligation imposed by law.
Section 6. Amendment, Repeal, Etc. Notwithstanding any
other provisions of this Charter or the Bylaws of the Corporation
(and notwithstanding the fact that a lesser percentage may be
specified by law, this Charter or the Bylaws of the Corporation),
the affirmative vote of the holders of 80% or more of the voting
power of the shares of the then outstanding Voting Stock, voting
together as a single class, shall be required to amend or repeal,
or adopt any provisions inconsistent with, Article X of this
Charter.
ARTICLE XI
Repurchase of Shares
The holders of shares shall have the right to approve the
repurchase of the Corporation's shares by the Corporation from
certain Interested Shareholders as follows:
Section 1. Vote of Shareholders Required for Certain
Repurchases of Shares. The affirmative vote or consent of the
holders or not less than a majority of the non-interested
outstanding shares (as hereinafter defined) of stock of the
Corporation entitled to vote in elections of directors (the "Voting
Stock"), voting for the purposes of this Article XI as one class,
shall be required to approve any direct or indirect purchase by the
Corporation of any shares of stock at a purchase price known by the
Corporation to be above the Fair Market Value (as hereinafter
defined and as determined on the date on which any such purchase by
the Corporation occurs or is to occur) of such stock from a person
who is known by the Corporation to be an Interested Shareholder (as
hereinafter defined), unless such purchase is made by the
Corporation pursuant to:
(a) a tender offer or exchange offer by the Corporation
for some or all of the outstanding shares of such stock made
on the same terms to all holders of such shares, or
(b) an open market purchase program approved by a
majority of the Continuing Directors.
Section 2. Certain Definitions. For purposes of this
Article XI:
2A. "Person", "Beneficial Owner", "Affiliate",
"Associate", and "Subsidiary" shall have the respective
meanings ascribed to such terms in Section 3 of Article X
above.
2B. "Interested Shareholder" shall have the same meaning
ascribed to such term in Section 3 of Article X above, except
that for purposes of this Article XI all references therein to
10% shall be to 5%.
2C. "Non-interested outstanding shares" are the shares
of the Corporation entitled to vote in elections of directors
(other than any shares beneficially owned by a person who is
an Interested Shareholder) which are issued and outstanding on
the record date for the determination of shareholders entitled
to notice of, and to vote at, any meeting of shareholders.
2D. "Fair Market Value" shall mean the last sale price,
on the last trading day immediately preceding the date upon
which the purchase of a share of the Corporation's stock by
the Corporation occurs or is to occur, as such last sale price
may be reported by the National Association of Securities
Dealers, Inc. Automated Quotations National Market System or
any system then in use, or if such stock is listed on a
National Securities Exchange, the highest closing sale price
on the day in question, of a share of such stock on such
exchange, or if no such quotations are available, the fair
market value on the day in question of a share of such stock
as determined by the Board in good faith.
Section 3. No Effect on Fiduciary Obligations of
Interested Shareholders. Nothing contained in this Article XI
shall be construed to relieve any Interested Shareholder from any
fiduciary obligation imposed by law.
Section 4. Determinations by the Board. The Board shall
have the power and duty to determine, for purposes of this Article
XI, on the basis of information known to such Board after
reasonable inquiry:
(a) the number of shares of stock of the Corporation
beneficially owned by any person;
(b) whether a person is an Interested Shareholder;
(c) the number of non-interested outstanding shares on
the record date for any shareholders' meeting;
(d) whether a person is an Affiliate or Associate of
another;
(e) whether Section 1 of this Article XI is or has
become applicable with respect to a proposed purchase of
shares by the Corporation; and
(f) if so, the Fair Market Value of such shares and
whether the purchase price thereof is above such Fair Market
Value.
Any such determination made in good faith shall be conclusive
and binding for all purposes of this Article XI. For the purposes
of determining whether a person is an Interested Shareholder and
determining the number of non-interested outstanding shares, the
number of shares of stock of the Corporation deemed to be
outstanding and entitled to vote in elections of Directors shall
include shares deemed beneficially owned by such Interested
Shareholder through application of clauses (i), (ii) or (iii) of
paragraph 3B of Section 3 of Article X above but shall not include
any other shares which may be issuable pursuant to any agreement,
arrangement or understanding, or upon exercise of conversion
rights, warrants or options, or otherwise.
Section 5. Amendment, Repeal, Etc. The provisions of this
Article XI may not be amended, modified or repealed unless
authorized and approved by the affirmative vote of the holders of
not less than a majority of the non-interested outstanding shares
of stock of the Corporation entitled to vote in elections of
directors, voting as one class.
ARTICLE XII
Indemnification
The Corporation shall have the authority and right to
indemnify and hold harmless its officers, directors, employees, and
agents from and against any claim, liability, loss, or expense
(including attorney's fees) with respect to which such
indemnification is permitted under the applicable provisions of the
Tennessee General Corporation Act, the Bylaws of the Corporation,
or any duly adopted resolution of the Board or shareholders;
provided, however, that absent any limitation or modification set
forth in the Bylaws or any resolution, this Article XII shall
require the Corporation to indemnify and hold harmless its
officers, directors, employees and agents to the fullest extent
permitted under the applicable provisions of the Tennessee General
Corporation Act. Such right of indemnification shall not be deemed
exclusive of any other rights to which such director, officer or
employee may be entitled apart from this provision.
ARTICLE XIII
Bylaws
The Board shall have power to make, alter, amend and repeal
the Bylaws (except so far as the Bylaws adopted by the shareholders
shall otherwise provide). Any Bylaws made by the directors under
the powers conferred hereby may be altered, amended or repealed by
the Board or by the shareholders. Notwithstanding the foregoing
and anything contained in this Charter to the contrary, Article II
of the Bylaws relating to action taken at annual and special
meetings of shareholders, cannot be altered, amended or repealed
and no provision inconsistent therewith shall be adopted without
the affirmative vote of the holders of at least 80% of the voting
power of all shares of the Corporation entitled to vote generally
in the election of directors, voting together as a single class.
Notwithstanding anything contained in this Charter to the contrary,
the affirmative vote of the holders of at least 80% of the voting
power of all shares of the Corporation entitled to vote generally
in the election of directors, voting together as a single class,
shall be required to alter, amend, adopt any provision inconsistent
with or repeal this Article XIII.
ARTICLE XIV
Special Meeting of Shareholders
No special meeting of shareholders shall be held upon the
demand of shareholders of the Corporation unless the holders of at
least twenty-five percent (25%) of all the votes entitled to be
cast on each issue proposed to be considered at the special meeting
shall have signed, dated, and delivered to the Corporation's
Secretary one or more written demands for the meeting describing
the purpose of purposes for which it is to be held.
AMENDED AND RESTATED BYLAWS
OF
SAKS INCORPORATED
(As amended effective September 17, 1998)
ARTICLE I
Identification; Offices and Registered Agent
Section 1. Identification. The name of the Corporation
is SAKS Incorporated, a Tennessee corporation (the "Corporation").
Section 2. Principal Office. The principal office of
this Corporation is located at 750 Lakeshore Parkway, Birmingham,
Alabama 35211, as provided in the Charter. The Board of Directors
may, by resolution, amend the Charter to change the address of the
principal office.
Section 3. Registered Agent. The Corporation has
designated and shall continue to have a registered agent in the
State of Tennessee. If the registered agent resigns or is for any
reason unable to perform his duties, the Corporation shall promptly
designate another registered agent. The Corporation may, by
resolution of the Board of Directors, appoint such other agents for
the service of process in such other jurisdictions as the Board of
Directors may determine.
ARTICLE II
Meetings of Shareholders
Section 1. Meetings. All meetings of the shareholders
for the election of directors shall be held in the City of Alcoa,
State of Tennessee, at such place as may be fixed from time to time
by the Board of Directors, or at such other place either within or
without the State of Tennessee as shall be designated from time to
time by the Board of Directors and stated in the notice of the
meeting. Meetings of shareholders for any other purpose may be
held at such time and place, within or without the State of
Tennessee, as shall be stated in the notice of the meeting or in a
duly executed waiver of notice thereof
Section 2. Annual Meetings. Annual meetings of the
shareholders, commencing with fiscal year 1988, shall be held on
the 2nd Monday of June if said date is not a legal holiday, and if
a legal holiday, then on the next day following which is not a
legal holiday, or at such other date and time as shall be
designated from time to time by the Board of Directors, for the
purpose of electing directors of the Corporation and for the
transacting of such other business as may properly come before the
meeting. Written notice of the annual meeting stating the place,
date and hour of the meeting shall be given to each shareholder
entitled to vote at such meeting not less than 10 days nor more
than 60 days before the date of the meeting.
Section 3. Shareholder List. The officer who has charge
of the stock ledger of the Corporation shall prepare and make, at
least 10 days before every meeting of the shareholders, a complete
list of the shareholders entitled to vote at the meeting, arranged
in alphabetical order, and showing the address of each shareholder
and the number of shares registered in the name of each
shareholder. Such list shall be open to the examination of any
shareholder, for the purpose germane to the meeting, during
ordinary business hours, for a period of at least 10 days prior to
the meeting, either at a place within the city where the meeting is
to be held (which place shall be specified in the notice of the
meeting), or, if not so specified at the place where the meeting is
to be held. The list shall also be produced and kept at the time
and place of the meeting during the whole time thereof, and may be
inspected by any shareholder who is present.
Section 4. Special Meetings. Special meetings of the
shareholders may be called by the Board of Directors or by the
Chairman of the Board, or by the President, and shall be called by
the Chairman, the President, the Secretary, or an assistant
Secretary at the request in writing of a majority of the Board of
Directors, or at the request in writing of the holders of record of
at least twenty-five percent (25%) of the outstanding shares of the
Corporation entitled to vote at the meeting. Each special meeting
shall be held at such time as the Board of Directors shall
determine, or, in the absence of such determination by the Board of
Directors, at such time as the person or persons calling or
requesting the call of the meeting shall specify in the notice or
in the written request. Written notice of a special meeting
stating the place, date and hour of the meeting and the purpose or
purposes for which the meeting is called, shall be given to each
shareholder entitled to vote at such meeting not less than 10 days
or more than 60 days before the date of the meeting. The business
transacted at any special meeting shall be limited to the purposes
stated in the notice.
Section 5. Waiver of Notice. The shareholders may waive
the requirement of written notice of annual and special meetings by
written waiver duly executed and filed with the minutes of the
meeting.
Section 6. Quorum. The holders of record of a majority
of the stock issued and outstanding and entitled to vote thereat,
present in person or represented by proxy, shall constitute a
quorum at all meetings of the shareholders for the transaction of
business except as otherwise provided by statute or by the Charter.
A quorum once present, is not broken by the subsequent withdrawal
of any shareholder. If, however, such quorum shall not be present
or represented at any meeting of the shareholders, the shareholders
entitled to vote thereat, present in person or represented by
proxy, shall have power to adjourn the meeting from time to time,
without notice other than announcement at the meeting, until a
quorum shall be present or represented. At such adjourned meeting
at which a quorum shall be present or represented by proxy, any
business may be transacted which might have been transacted at the
meeting as originally notified. If the adjournment is for more
than 30 days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting
shall be given to each shareholder of record entitled to vote at
the meeting. When a quorum is present at any meeting, the vote of
the holders of a majority of the stock having voting power present
in person or represented by proxy shall decide any question brought
before such meeting, unless the question is one upon which by
express provision of the statutes or of the Charter a different
vote is required, in which case such express provision shall govern
and control the decision of such question.
Section 7. Meeting Chairman. The Chairman of the Board,
or if absent or unable to serve, the President, or if absent or
unable to serve, the Treasurer or Secretary, shall call meetings of
the shareholders to order and act as Chairman of such meetings.
The shareholders may elect any one of their number to act as
Chairman of any meeting in the absence of the aforenamed
individuals.
Section 8. Proxies. Every shareholder entitled to vote
at a shareholders' meeting may authorize another person or persons
to act for him by proxy. Each proxy must be in writing and signed
by the shareholder or by his attorney in fact. No proxy shall be
valid after the expiration of 11 months from the date thereof
unless otherwise provided in the proxy. Each proxy shall be
revocable at the pleasure of the shareholder executing it, unless
it conforms to the requirements of an irrevocable proxy, as
provided by statute. All proxies must be delivered to the
Secretary of the Corporation prior to the opening of the meeting,
except for proxies granted after the meeting has opened, which
proxies shall be delivered to the Secretary as soon as practicable
after execution.
Section 9. Determination of Shareholder. In order to
determine shareholders entitled to notice of or to vote at any
meeting of shareholders, or any adjournment thereof, or
shareholders entitled to receive payment of any dividend, or in
order to make a determination of shareholders for any other proper
purpose, the Board of Directors may provide that the Stock Transfer
Books be closed for a stated period, but not to exceed 40 days. If
the Stock Transfer Books are closed for the purpose of determining
shareholders entitled to notice of or to vote at a meeting of
shareholders, such books shall be closed for at least 10 days
immediately preceding such meeting. In lieu of closing the Stock
Transfer Books, the Board of Directors may fix in advance a date as
the record date for any such determination of shareholders, such
date in any case to be not less than 10 days prior to the date on
which the particular action requiring such determination of
shareholders is to be taken. If the Stock Transfer Books are not
closed and no record date is fixed for determination of
shareholders entitled to notice of or entitled to vote at a meeting
of shareholders or shareholders entitled to receive payment of a
dividend, the date on which notice of the meeting is mailed, or the
date on which the resolution of the Board declaring such dividend
is adopted, as the case may be, shall be the record date for such
determination of shareholders.
Section 10. Shareholder Action By Written Consent. Any
action required or permitted to be taken by the shareholders of the
Corporation must be effected at a duly called annual or special
meeting of such holders and may not be effected by any consent in
writing by such holders.
ARTICLE III
Board of Directors
Section 1. Number of Directors. The affairs of the
Corporation shall be managed by a Board of up to 18 directors.
Effective as of the annual meeting of shareholders in 1997,
the Board shall be divided into three classes, designated as Class
I, Class II, and Class III, as nearly equal in number as possible.
The initial term of office of Class I shall expire at the annual
meeting of shareholders in 1998, that of Class II shall expire at
the annual meeting of shareholders in 1999, and that of Class III
shall expire at the annual meeting in 2000, and in all cases as to
each director until his or her successor shall be elected and shall
qualify, or until his or her earlier resignation, removal from
office, death, or incapacity.
Subject to the foregoing, at each annual meeting of
shareholders the successors to the class of directors whose term
shall then expire shall be elected to hold office for a term
expiring at the third succeeding annual meeting and until their
successors shall be elected and qualified. Vacancies on the Board
for any reason, and newly created directorships resulting from any
increase in the authorized number of directors, may be filled by a
vote of the majority of the directors then in office, although less
than a quorum, or by a sole remaining director.
If the number of directors is changed, the Board shall
determine the class or classes to which the increased or decreased
number of directors shall be apportioned; provided that the
directors in each class shall be as nearly equal in number as
possible. No decrease in the number of directors shall have the
effect of shortening the term of any incumbent director.
Notwithstanding any other provisions of the Charter or these
Bylaws (and notwithstanding that a lesser percentage may be
specified by law, the Charter, or these Bylaws), the affirmative
vote of the holders of 80% or more of the voting power of the then
outstanding shares of capital stock of the Corporation entitled to
vote generally in the election of directors, voting together as a
single class, shall be required to amend or repeal, or adopt any
provisions inconsistent with this Article III, Section 1 of these
Bylaws.
Section 2. Removal of Directors. Any or all directors
may be removed by a vote of a majority of the shareholders entitled
to vote, only for cause as defined by the Tennessee Business
Corporation Act.
Section 3. Filling of Vacancies. Vacancies and newly
created directorships resulting from any increase in the authorized
number of directors, for any reason, may be filled by a vote of the
majority of the directors then in office, although less than a
quorum exists, or by a sole remaining director, and the directors
so chosen shall hold office until the next annual election and
until their successors are duly elected and qualified, unless
sooner displaced. If there are no directors in office, then an
election of directors may be held in the manner provided by
statute. If, at the time of filling any vacancy or any newly
created directorship, the directors then in office shall constitute
less than a majority of the whole board (as constituted immediately
prior to any such increase), the vacancy or newly created
directorship may be filled by vote of the shareholders at any
meeting of the shareholders, notice of which shall have referred to
the proposed election. Any director elected by the shareholders to
fill any vacancy shall be elected to hold office until the next
annual meeting of shareholders and until their successors are duly
elected and qualified, unless sooner displaced.
Section 4. Annual Meeting. The annual meeting of the
Board of Directors shall be held immediately after and at the same
place as the annual meeting of the shareholders, provided a quorum
be present and no notice of such meeting shall be necessary. In
the event such meeting of the Board of Directors is not held at
such time and place, the meeting may be held at such time and place
as shall be specified in a notice given as hereinafter provided for
special meetings of the Board of Directors, or as shall be
specified in a written waiver signed by all of the directors.
Section 5. Notice of Meetings. The annual and all
regular meetings of the Board of Directors may be held without
notice at such time and at such place as shall from time to time be
determined by the Board. Special meetings shall be held upon
written notice not less than one day before the meeting.
Section 6. Special Meetings. Special meetings of the
Board may be called by the Chairman of the Board or President, or
if either is absent or unable to do so, by any Vice President, or
by any two directors.
Section 7. Quorum. At all meetings of the Board, a
majority of directors shall constitute a quorum for the transaction
of business and the act of a majority of the directors present at
any meeting at which there is a quorum shall be the act of the
Board of Directors, except as may be otherwise specifically
provided by law, the Charter or by these Bylaws. If a quorum shall
not be present at any meeting of the Board of Directors, the
directors present thereat may adjourn the meeting from time to
time, without notice other than announcement at the meeting, until
a quorum shall be present.
Section 8. Dissent to Action. A director who is present
at a meeting of the Board, at which any action is taken, shall be
presumed to have concurred in the action, unless his dissent
thereto shall be entered in the Minutes of the meeting, or unless
he shall submit his written dissent to the person acting as the
Secretary of the meeting before the adjournment thereof, or shall
deliver or send such dissent to the Secretary of the Corporation
promptly after the adjournment of the meeting. Such rights to
dissent shall not apply to a director who voted in favor of any
such action. A director who is absent from a meeting at which such
action is taken shall be presumed to have concurred in the action
unless he shall deliver or send by registered or certified mail his
dissent thereto to the Secretary of the Corporation or shall cause
such dissent to be filed with the Minutes of the proceedings of the
Board within 10 days after learning of such action.
Section 9. Action without Meeting. Unless otherwise
restricted by the Charter or these Bylaws, any action required or
permitted to be taken at any meeting of the Board of Directors or
of any committee thereof may be taken without a meeting, if all
members of the Board or committee, as the case may be, consent
thereto in writing setting forth the actions so taken, signed by
all of the persons entitled to vote thereon, and the writing or
writings are filed with the minutes of proceedings of the Board or
committee.
Section 10. Board Committees. The Board of Directors may,
by resolution passed by a majority of the whole Board, designate
one or more committees, each committee to consist of one or more of
the directors of the Corporation. The Board may designate one or
more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the
committee. Any such committee, to the extent provided in the
resolution of the Board of Directors, shall have and may exercise
all the powers and authority of the Board of Directors in the
management of the business and affairs of the Corporation, but no
such committee shall have the power or authority in reference to
amending the Charter, adopting an agreement of merger or
consolidation, recommending to the shareholders the sale, lease or
exchange of all or substantially all of the Corporation's property
and assets, recommending to the shareholders a dissolution of the
Corporation or a revocation of the dissolution, or amending the
Bylaws of the Corporation; and, unless the resolution or the
Charter expressly so provide, no such committee shall have the
power or authority to declare a dividend or to authorize the
issuance of stock. Such committee or committees shall have such
name or names as may be determined from time to time by resolution
adopted by the Board of Directors. Each committee shall keep
regular minutes of its meetings and report the same to the Board of
Directors when required.
Section 11. Compensation of Directors. Unless otherwise
restricted by the Charter, the Board of Directors shall have the
authority to fix the compensation of directors. The directors may
be paid their expenses, if any, of attendance at each meeting of
the Board of Directors and may be paid a fixed sum for attendance
at each meeting of the Board of Directors and/or a stated salary as
director. No such payment shall preclude any director from serving
the Corporation in any other capacity and receiving compensation
therefor. Members of special or standing committees may be allowed
like compensation for attending committee meetings.
Section 12. Indemnification. The Corporation shall
indemnify, to the full extent authorized or permitted by the
Tennessee Business Corporation Act, any person made, or threatened
to be made, a party to any threatened, pending or completed action,
suit or proceeding (whether civil, administrative or investigative)
by reason of the fact that he, his testator or intestate is or was
a director of the Corporation or serves or served as a director of
any other enterprise at the request of the Corporation.
Section 13. Mandatory Resignation. Directors who are also
officers of the Corporation shall submit a letter of resignation as
such to the Board of Directors upon any termination of employment
as an officer of the Corporation, and directors who are not
officers of the Corporation shall likewise submit a letter of
resignation upon any change in that director's principal business
or other activity in which the director was engaged at the time of
his or her election.
ARTICLE IV
Officers
Section 1. Appointment. The Board of Directors at its
first meeting after each annual
meeting of stockholders shall choose a Chairman of the Board, a
Chief Executive Officer, a President, an Executive Vice President,
a Chief Operating Officer, a Chief Financial Officer, a Treasurer,
and a Secretary. The Board of Directors may also choose additional
vice presidents and one or more assistant secretaries and assistant
treasurers. Any two of the aforementioned offices may be filled by
the same person, except that no one person may be Secretary and
also President. No person shall purport to execute or attest any
document or instrument on behalf of the Corporation in more than
one capacity.
Section 2. Term. The officers of the Corporation shall
hold office for one year or until their successors are chosen and
qualified subject, however, to the removal of any officer pursuant
to these Bylaws.
Section 3. Salaries. The salaries of all officers of the
Corporation shall be fixed by the Board of Directors.
Section 4. Removal. Any officer elected or appointed by
the Board of Directors may be removed at any time by the
affirmative vote of a majority of the Board of Directors. Any
vacancy occurring in any office of the Corporation shall be filled
by the Board of Directors.
Section 5. Duties. All officers shall have such
authority to perform such duties in the management of the
Corporation as are normally incident to their offices and as the
directors from time to time provide.
Section 6. The Chairman of the Board and Chief Executive
Officer. The Chairman of the Board and Chief Executive Officer of
the Corporation shall preside at all meetings of the shareholders
and the Board of Directors, shall have general and active
management of the business of the Corporation, and shall see that
all orders and resolutions of the Board of Directors are carried
into effect.
Section 7. Other Duties of the Chairman of the Board. He
shall execute bonds, mortgages and other contracts, except where
required or permitted by law to be otherwise signed and executed
and except where the signing and execution thereof shall be
expressly delegated by the Board of Directors to some other officer
or agent of the Corporation.
Section 8. The President. The President shall perform
such duties as shall be prescribed to him from time to time by the
Board of Directors.
Section 9. Duties of the President and the Vice
President(s). In the absence of the Chief Executive Officer or in
the event of his inability or refusal to act, the President shall
perform the duties of the Chief Executive Officer and, when so
acting, shall have all the powers of and be subject to all the
restrictions upon the Chief Executive Officer. The Vice
President(s) shall perform such other duties and have such other
powers as the Board of Directors may from time to time prescribe.
Section 10. The Secretary. The Secretary shall attend all
meetings of the Board of Directors and all meetings of the
shareholders and record all the proceedings of the meetings of the
Corporation and of the Board of Directors in a book to be kept for
that purpose and shall perform like duties for the standing
committees when required. He shall give, or cause to be given,
notice of all meetings of the shareholders and special meetings of
the Board of Directors, and shall perform such other duties as may
be prescribed by the Board of Directors or the President, under
whose supervision he shall be.
Section 11. Assistant Secretary. The Assistant Secretary,
or if there be more than one, the assistant secretaries in the
order determined by the Board of Directors (or if there be no such
determination, then in the order of their election) shall, in the
absence of the Secretary or in the event of his inability or
refusal to act, perform the duties and exercise the powers of the
Secretary and shall perform such other duties and have such other
powers as the Board of Directors may from time to time prescribe.
Section 12. The Chief Financial Officer and Treasurer.
The Chief Financial Officer and the Treasurer, in his capacity as
such officers, shall have the custody of the corporate funds and
securities and shall keep full and accurate accounts of receipts
and disbursements in books belonging to the Corporation and shall
deposit all moneys and other valuable effects in the name and to
the credit of the Corporation in such depositories as may be
designated by the Board of Directors.
Section 13. Duties of the Chief Financial Officer and
Treasurer. He shall disburse the
funds of the Corporation as may be ordered by the Board of
Directors, taking proper vouchers for such disbursements, and shall
render to the President and the Board of Directors, at its regular
meetings, or when the Board of Directors so requires, an account of
all his transactions as the Treasurer and of the financial
condition of the Corporation.
Section 14. Bond. If required by the Board of Directors,
the Chief Financial Officer and the Treasurer shall give the
Corporation a bond (which shall be renewed every six years) in such
sum and with such surety or sureties as shall be satisfactory to
the Board of Directors for the faithful performance of the duties
of his office and for the restoration to the Corporation, in case
of his death, resignation, retirement or removal from office, of
all books, papers, vouchers, money and other property of whatever
kind in his possession or under his control belonging to the
Corporation.
Section 15. Assistant Treasurer(s). The Assistant
Treasurer, or if there shall be more than one, the Assistant
Treasurers in the order determined by the Board of Directors (or if
there be no such determination, then in the order of their
election) shall, in the absence of the Treasurer or in the event of
his inability or refusal to act, perform the duties and exercise
the powers of the Treasurer and shall perform such other duties and
have such other powers as the Board of Directors may from time to
time prescribe.
Section 16. Indemnification. The Corporation shall
indemnify, to the full extent authorized or permitted by the
Tennessee Business Corporation Act, any person made, or threatened
to be made, a party to any threatened, pending or completed action,
suit or proceeding (whether civil, criminal, administrative or
investigative) by reason of the fact that he, his testator or
intestate is or was an officer of the Corporation or serves or
served as a director or officer of any other enterprise at the
request of the Corporation.
ARTICLE V
Capital Stock
Section 1. Certificate. Every holder of stock in the
Corporation shall be entitled to have a certificate signed by, or
in the name of the Corporation by, the Chairman of the Board, the
Chief Executive Officer or the President and the Chief Operating
Officer, a Vice President, the Treasurer (or an Assistant
Treasurer), or the Secretary (or an Assistant Secretary) of the
Corporation, certifying the number of shares owned by him in the
Corporation.
Section 2. Facsimile Signatures. Where a certificate is
countersigned (1) by a transfer agent other than the Corporation or
its employee, or (2) by a registrar other than the Corporation or
its employee, any other signature on the certificate may be
facsimile. In case an officer, transfer agent or registrar who has
signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent or
registrar before such certificate is issued, it may be issued by
the Corporation with the same effect as if he were such officer,
transfer agent or registrar at the date of issuance.
Section 3. Notice of Restrictions. Each certificate of
stock which is restricted or limited as to its transferability or
voting rights, or which is callable under the Charter, which is
preferred or limited as to dividends or rights upon voluntary or
involuntary dissolution, shall have a notice of such restriction,
limitation or preference conspicuously stated on the face or back
of the certificate. Upon the removal of expiration of any such
restriction or limitation, the holder of such certificate shall be
entitled to receive a new certificate upon the surrender of the old
restricted or limited certificates, and the payment of the
reasonable expenses of the Corporation incurred in connection
therewith.
Section 4. Reissuance of Certificates. The Board of
Directors may direct a new certificate or certificates to be issued
in place of any certificate or certificates theretofore issued by
the Corporation alleged to have been lost, stolen or destroyed,
upon the making of an affidavit of that fact by the person claiming
the certificate of stock to be lost, stolen or destroyed. When
authorizing such issue of a new certificate or certificates, the
Board of Directors may, in its discretion and as a condition
precedent to the issuance thereof, require the owner of such lost,
stolen or destroyed certificate or certificates, or his legal
representative, to advertise the same in such manner as it shall
require and/or to give the Corporation a bond in such sum as it may
direct as indemnity against any claim that may be made against the
Corporation with respect to the certificate alleged to have been
lost, stolen or destroyed.
Section 5. Transfer of Shares. The Corporation shall
register a transfer of a stock certificate presented to it for
transfer if:
(a) the certificate is endorsed by the appropriate person
or persons;
(b) the signature of the appropriate person or persons has
been guaranteed by a national banking association, a bank
organized and operating under the statutes of the State
of Tennessee, or a member of the National Association of
Security Dealers, and reasonable assurance is given that
the endorsements are effective, unless the Secretary of
the Corporation waives such requirements;
(c) there has been compliance with any applicable law
relating to the collection of taxes; and
(d) the transfer is in fact rightful or is to a bona fide
purchaser.
Section 6. Endorsements. An endorsement of the stock
certificate in registered form is made when an appropriate person
signs on it or on a separate document an assignment or transfer of
it, or a power to assign or transfer it, or when the signature of
this person is written without more upon the back of the
certificate. An endorsement may be in blank, which includes an
endorsement to bearer, or special, which specifies the person to
whom the stock is to be transferred, or who has the power to
transfer it. The Corporation may elect to require reasonable
assurance beyond that specified in this Section.
Section 7. Registered Stockholders. The Corporation
shall be entitled to recognize the exclusive right of a person
registered on its books as the owner of shares to receive
dividends, and to vote as such owner, and to hold liable for calls
and assessments a person registered on its books as the owner of
shares, and shall not be bound to recognize any equitable or other
claim to or interest in such share or shares on the part of any
other person, whether or not it shall have express or other notice
thereof, except as otherwise provided by the laws of Tennessee.
ARTICLE VI
Dividends, Surplus and Reserve
Section 1. Dividends. The Board of Directors may from
time to time declare, and the Corporation may pay, dividends on its
outstanding shares in cash, property or its own shares, except
where the Corporation is insolvent, as that term is defined in
Section 48-1-102 (14), Tennessee Code Annotated, or when the
payment thereof would render the Corporation insolvent, or when the
declaration of payment thereof would be contrary to any
restrictions contained in the Charter, these Bylaws, or in any
applicable valid contract. The declaration and payment of any such
dividend shall be in accordance with Section 48-1-511, Tennessee
Code Annotated, as it may be amended from time to time.
Section 2. Capital Distributions. The Board of Directors
may distribute to the shareholders of the Corporation out of
capital surplus, a portion of its assets, in cash or property,
subject to the following provisions:
(a) no such distribution shall be made at a time when the
Corporation is insolvent or when such distribution would
render the Corporation insolvent;
(b) no such distribution shall be made unless such
distribution is authorized by the affirmative vote of the
holders of the majority of all of the outstanding shares
of stock entitled to vote thereon;
(c) no such distribution shall be made to the holders of any
class of shares unless all cumulative dividends accrued
on all preferred or special classes of shares entitled to
preferential dividends shall have been fully paid;
(d) no such distribution shall be made to the holders of any
class of shares which would reduce the remaining net
assets of the Corporation below the aggregate
preferential amount payable in the event of voluntary
liquidation to the holders of shares having preferential
rights to the assets of the Corporation in the event of
liquidation; and
(e) each such distribution, when made, shall be identified as
a distribution from capital surplus and the amount per
share shall be disclosed to the shareholders receiving
the same, concurrently with the distribution thereof.
Section 3. Increases of Capital Surplus. The capital
surplus of the Corporation may be increased from time to time by
resolution of the Board, directing that all or part of the earned
surplus of the Corporation be transferred to capital surplus. The
Board of Directors may, by resolution, apply any part or all of the
capital surplus of the Corporation to the reduction or elimination
of any deficit arising from losses however incurred; provided,
however, that the earned surplus has first been exhausted by
charging such losses to earned surplus and then only to the extent
that such losses exceed the earned surplus. Each such application
of capital surplus shall, to the extent thereof, effect a reduction
of capital surplus.
Section 4. Seal. The Corporation shall have a corporate
seal. The presence or absence of a seal on any instrument shall
not affect the character, validity, or legal effect thereof in any
respect. The affixing of a seal shall not be necessary for the
execution of any instrument or document by the Corporation.
ARTICLE VIII
Amendments
Subject to the provisions of the Charter of the Corporation,
these Bylaws may be altered, amended, or repealed or new bylaws may
be adopted by the vote of a majority of all of the shareholders or
by the majority vote of the entire Board of Directors, when such
power is conferred upon the Board of Directors by the Charter, at
any regular meeting of the shareholders or of the Board of
Directors or at any special meeting of the shareholders or of the
Board of Directors if notice of such alteration, amendment, repeal
or adoption of new bylaws be contained in the notice of such
special meeting.
ARTICLE VIII
Miscellaneous Provisions
Section 1. Fiscal Year. The fiscal year of the
Corporation shall be fixed by resolution of the Board of Directors.
Section 2. Insurance. The Corporation may purchase and
maintain insurance on behalf of any person who is or was or has
agreed to become a director or officer of the Corporation, or is or
was serving at the request of the Corporation as a director or
officer of another corporation, partnership, joint venture, trust
or other enterprise against any liability asserted against him and
incurred by him or on his behalf in any such capacity, or arising
out of his status as such, whether or not the Corporation would
have the power to indemnify him against such liability under the
provisions of this Article, provided that such insurance is
available on acceptable terms, which determination shall be made by
a vote of a majority of the entire Board of Directors.
Section 3. Savings Clause. If this Article or any
portion hereof shall be invalidated on any ground by any court of
competent jurisdiction, then the Corporation may nevertheless
indemnify each director or officer of the Corporation as to costs,
charges and expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement with respect to any action, suit or
proceeding, whether civil, criminal, administrative or
investigative, including an action by or in the right of the
Corporation, to the full extent permitted by any applicable portion
of this Article that shall not have been invalidated and to the
full extent permitted by applicable law.
Section 4. Notices. Whenever, under the provisions of
the statutes, the Charter or these Bylaws, notice is required to be
given to any director or shareholder, it shall not be construed to
mean personal notice, but such notice may be given in writing, by
mail, addressed to such director or shareholder at his address as
it appears on the records of the Corporation, with postage thereon
prepaid, and such notice shall be deemed to be given at the time
when the same shall be deposited in the United States mail. Notice
to directors may also be given by telegram or electronic facsimile,
in which event it shall be deemed to have been given when deposited
with a telegraph or electronic facsimile office for transmission.
Section 5. Indemnification. Notwithstanding anything in
the Charter to the contrary, the Corporation shall be permitted,
but shall not be required, to indemnify and hold harmless any
employee or agent of the Corporation made, or threatened to be
made, a party to any threatened, pending or completed action, suit
or proceeding, whether civil, criminal, administrative or
investigative.
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is entered into as of
the 3rd day of September 1998, by and between Saks Holdings, Inc.
("Company"), Proffitt's, Inc. ("Proffitt's"), and Philip B. Miller
("Executive").
WHEREAS, Company and Executive are parties to a certain
Amended and Restated Employment Agreement, dated as of March 1,
1996 (the "Old Agreement"); and
WHEREAS, Company, Proffitt's and Executive wish to enter into
this Agreement to replace the Old Agreement,
NOW THEREFORE, effective as of the Effective Time, as that
phrase is used in the Agreement and Plan of Merger among
Proffitt's, Fifth Merger Corporation and Saks Holdings, Inc. dated
July 4, 1998 (the "Merger Agreement"), the terms of the Old
Agreement will become void and this Agreement will govern
Executive's employment with Company. In the event that the Merger
Agreement terminates without consummation of the merger
transaction, the Old Agreement shall remain in effect.
1. Positions; Duties; Place of Employment. (a)Executive shall
serve as Chief Executive Officer of Company and Saks Fifth Avenue
through June 30, 2001, with duties, authority and status normally
associated with such position within the Proffitt's organization.
Executive shall report directly to the Chief Executive Officer of
Proffitt's. While serving as Chief Executive Officer of Company
and Saks Fifth Avenue, and excluding any periods of vacation and
sick leave to which he is entitled, Executive shall devote his best
efforts and substantially all of his business time and attention to
the performance of his duties; provided, however, that it shall not
be a violation of this Agreement for Executive to (A) serve on
corporate, civic or charitable boards or committees, (B) deliver
lectures, fulfill speaking engagements, or teach, and (C) manage
personal investments, so long as such activities do not
unreasonably interfere with the performance of Executive's
responsibilities hereunder. It is expressly understood and agreed
that to the extent that any such activities have been conducted
regularly by Executive prior to the Effective Time, the continued
conduct of such activities (or the conduct of activities similar in
nature and scope thereto) after the Effective Time shall not
thereafter be deemed to unreasonably interfere with the performance
of Executive's responsibilities hereunder.
(b) As of the Effective Time, the Board of Directors of
Proffitt's (the "Board") shall nominate Executive(and the Board
shall elect Executive) as a director of Proffitt's. So long as
Executive serves as Chief Executive Officer of Company or as a
consultant hereunder, Proffitt's shall cause Executive to be
included in the slate of nominees recommended by the Board to
Proffitt's shareholders for election as directors at each annual
meeting of shareholders of Proffitt's at which his class of
directors is standing for election, and Proffitt's shall use its
reasonable best efforts to cause the election of Executive,
including soliciting proxies in favor of election of Executive.
(c) Executive's employment shall be principally at
Company's offices in New York City, except for business travel.
(d) After June 30, 2001, when Executive is no longer
serving as Chief Executive Officer of Company and Saks Fifth
Avenue, he shall be employed as a consultant to Company and
Proffitt's through June 30, 2003. During the consultancy period,
Executive agrees to make himself reasonably available from time to
time on reasonable notice to consult and cooperate with and advise
Company with respect to such matters involving the business of
Company as may reasonably be requested by the Chief Executive
Officer of Proffitt's; provided, however, that it is expressly
understood that Executive may pursue other personal or full-time
business interests during the consultancy period (subject to the
non-competition provisions hereof).
2. Compensation. Executive's compensation and benefits under
this Agreement shall be as follows:
(a) Base Salary. Company shall pay Executive abase
salary ("Base Salary") at a rate of no less than $1,350,000 per
year through June 30, 2003. Executive's Base Salary shall be paid
in installments in accordance with Company's normal payment
schedule for its senior management. All payments shall be subject
to the deduction of payroll taxes and similar assessments as
required by law.
(b) Bonus. In addition to the Base Salary, Executive
shall be eligible for a yearly cash bonus of up to 55%of Base
Salary as long as he is serving as Chief Executive Officer of
Company. The method for determining whether such a bonus is
earned, or the portion thereof earned, shall be based on Saks
Fifth Avenue's divisional profit, as calculated in a manner and in
accordance with the policies that Proffitt's applies consistently
to its operating divisions. The Annual Bonus shall be paid in
accordance with the Company's payroll policies and practices for
executive employees.
(c) Incentive Compensation. At the Effective Time of
the Merger (the "Grant Date"), Executive shall be granted
anon-qualified option ("Option") to purchase one-hundred and sixty
thousand (160,000) shares of Proffitt's common stock at an option
price equal to the closing price of the stock on the last date the
market was open before the Effective Time, as reported in the Wall
Street Journal. This Option shall be granted pursuant to
Proffitt's 1997 Stock-Based Incentive Plan ("1997 Plan") and shall
be subject to the terms and conditions thereof. The Option shall be
vested and exercisable on or after the first anniversary of the
Grant Date to the extent of one-third of the shares covered
thereby; vested and exercisable to the extent of an additional
one-third of the shares covered thereby on and after the second
anniversary of the Grant Date; and vested and exercisable to the
extent of the remaining one-third of the shares covered thereby on
and after June 30, 2001; provided, however, that the Option shall
become fully vested and exercisable upon Executive's death,
Disability, termination of Executive's employment by Company
without Cause or termination of Executive's employment for Good
Reason. Executive must exercise the vested portion of the Option
within three months after termination of employment, unless his
employment is terminated by death, Disability, Company without
Cause, or Executive for Good Reason, in which case, Executive must
exercise the Option before the earlier of three years from the date
of termination or July 1, 2004. As long as Executive serves as
Chief Executive Officer of Company, he shall be eligible for future
option grants pursuant to Proffitt's generally applicable policies
for persons at Executive's level.
(d) Insurance and Benefits. During the term of this
Agreement, Company shall allow Executive to participate in each
employee benefit plan and to receive each executive benefit that
Company provides for senior executives at the level of Executive's
position. Notwithstanding the foregoing, during the term of this
Agreement, (1) Company shall reimburse Executive(through insurance
or otherwise) for the full amount of any medical, dental and
vision-care expenses incurred by Executive and his spouse and
dependent children during the term of this Agreement, and (2)
Company shall provide life insurance coverage(through its life
insurance plan or otherwise) to Executive in an amount equal to
twice his Base Salary, and Executive may purchase at his own
expense additional coverage in an amount equal to his Base Salary.
(e) Other Perquisites: As long as Executive serves as
Chief Executive Officer of Company and Saks Fifth Avenue, he shall
be provided with a $40,000 per year personal expense account, car
service for work-related travel, and reimbursement for his wife's
travel expenses for work-related travel.
3. Term. This Agreement shall expire on June 30,2003;
provided, however, Company, Proffitt's, and Executive may terminate
this Agreement and Executive's employment at an earlier time
pursuant to the provisions of Section 4 of this Agreement. The
non-competition provisions in Section 5 shall survive termination
or expiration of this Agreement.
In addition, this Agreement shall terminate upon the death of
Executive, except as to: (a) Executive's estate's right to exercise
the Option pursuant to this Agreement and other unexercised stock
options pursuant to Company's and Proffitt's stock option plans
then in effect (the "Stock Option Rights"),(b) compensation for
services previously rendered and reimbursements for expenses
previously incurred (the "Accrued Benefits") (c) any rights which
Executive's estate or dependents may have under COBRA or any other
federal or state law or which are derived independent of this
Agreement by reason of his participation in any employee benefit
arrangement or plan maintained by Company or Proffitt's ("Statutory
Rights"); (d)the right of Executive's spouse, upon written notice
to Company, to continue to receive for her life, at her cost, the
benefits provided under the health care plan of Company then in
effect, which benefits may but need not be provided under said
plan; and(e) the payment or provision to or in respect of Executive
of any other amounts or benefits required to be paid or provided or
which Executive is eligible to receive under any plan, program,
policy or practice or contract or arrangement of Proffitt's and its
affiliated companies (the "Other Benefits").
This Agreement may also be terminated by the Company upon
Executive's Disability (as hereinafter defined), except as to: (a)
the Stock Option Rights; (b) the Accrued Benefits; (c)the Statutory
Rights; (d) the right of the Executive and his spouse or
representative within 45 days of such termination, to continue to
receive for his life and that of his spouse, at Executive's cost or
the cost of his spouse, the benefits provided under the health care
plan of Company, then in effect, which benefits may but need not be
provided under said plan (the"Continuing Health Benefits"); and (e)
the Other Benefits. For purposes of this Agreement, "Disability"
shall mean the absence of Executive from his duties with Company on
a full-time basis for 180 consecutive business days as a result of
incapacity due to mental or physical illness which is determined to
be total and permanent by a physician selected by Company or its
insurers and acceptable to Executive or his legal representative.
4. Termination Of Employment.
(a) Company and Proffitt's shall have the right to
terminate Executive's employment under this Agreement for"Cause",
in which event no salary or bonus shall be paid after termination
for Cause except for the Accrued Benefits. For purposes of this
Agreement, the term "Cause" shall mean and be strictly limited to:
(i) conviction of Executive, after all applicable rights of appeal
have been exhausted or waived, for any felony that is materially
and demonstrably injurious to Company; or (ii) willful commission
of any material act of fraud or dishonesty by Executive against
Company. For purposes of this provision, no act or failure to
act, on the part of Executive, shall be considered "willful" unless
it is done, or omitted to be done, by Executive in bad faith or
without reasonable belief that Executive's action or omission was
in the best interests of Company. Any act, or failure to act,
based upon authority given pursuant to a resolution of the Board or
upon the instructions of the Chief Executive Officer of Proffitt's
or based upon the advice of counsel for Proffitt's or Company shall
be conclusively presumed to be done, or omitted to be done, by
Executive in good faith and in the best interests of Company. The
cessation of employment of Executive shall not be deemed to be for
Cause unless and until there shall have been delivered to Executive
a copy of a resolution duly adopted by the affirmative vote of not
less than two-thirds of the entire membership of the Board at a
meeting of the Board called and held for such purpose (after
reasonable notice is provided to Executive and Executive is given
an opportunity, together with counsel, to be heard before the
Board), finding that, in the good faith opinion of the Board,
Executive is guilty of the conduct described in subparagraph (i) or
(ii) above and specifying the particulars thereof in detail.
(b) Executive shall have the right to terminate his
employment for good reason and to receive the benefits under
Section 4(d) or 4(e) as the case may be. The term "good
reason"shall mean (1) a material breach by Company or Proffitt's of
any of their obligations under this Agreement (including, but not
limited to, a mandatory relocation of Executive from the New York
City area and, prior to June 30, 2001, a demotion from the position
of Chief Executive Officer of Company and Saks Fifth Avenue), which
breach is not cured within 20 business days of the receipt of
written notice of such breach by Company or Proffitt's from
Executive, or (2) the occurrence of a "change in control" of
Proffitt's as that phrase is defined in the 1997 Plan.
(c) Company and Proffitt's shall have the right to
terminate Executive's employment under this Agreement at anytime
without cause by paying the benefits set forth in Section 4(d) or
4(e) as the case may be.
(d) In the event that Executive's employment is
terminated by Company or Proffitt's without Cause or by Executive
with good reason on or before June 30, 2001, Company shall: (i) pay
Executive within 30 days of such termination, the Accrued Benefits
and an amount in cash equal to the sum of (a)the product of 125% of
Executive's Base Salary times the number of years (including
partial years) remaining through June 30,2001, plus (b) 200% of
Executive's Base Salary; provided, however, that this sum shall be
capped so that the payment does not exceed 3.75 times Executive's
Base Salary (ii) immediately cause the full vesting and
exercisability of all options granted on or after the Effective
Time of the Merger and Executive shall thereafter possess the Stock
Option Rights; (iii) provide Executive continued participation in
Company's benefits plans for three years, (iv), ensure that
Executive has a minimum of 26 years of credited service for
purposes of Company's pension plan and supplemental pension plan;
and (v) provide Executive(and, to the extent applicable, his spouse
and dependent children) with the Statutory Rights, Continuing
Health Benefits and Other Benefits. The amount of the compensation
paid under this Section 4(d) that will be allocated as
consideration for Executive's entering into the non-competition
provisions of Section 5 shall be determined by Company and
Proffitt's in light of relevant market factors.
(e) In the event that Executive's employment as a
consultant is terminated by Company without cause or by Executive
with good reason after June 30, 2001 and before June 30, 2003,
Company shall: (i) pay within 30 days of such termination an amount
in cash equal to what Executive would have received as cash
compensation through June 30, 2003; (ii)immediately cause the full
vesting and exercisability of all options granted on or after the
Effective Time of the Merger;(iii) provide Executive continued
participation in Company's benefits plans through June 30, 2003;
(iv) ensure that Executive has a minimum of 26 years of credited
service for purposes of the Company's pension plan and supplemental
pension plan; and(v) provide Executive (and, to the extent
applicable, his spouse and dependent children) with the Statutory
Rights, Continuing Health Benefits and Other Benefits. The amount
of the compensation paid under this Section 4(e) that will be
allocated as consideration for Executive's entering into then
on-competition provisions of Section 5 shall be determined by
Company and Proffitt's in light of relevant market factors.
(f) If Executive's employment is terminated, Executive
agrees to resign as a director of Proffitt's (and any of its
subsidiaries or affiliates), effective as of the date of such
termination, and Executive agrees to return to Company upon such
termination any of the following which contain confidential
information: all documents, instruments, papers, facsimiles, and
computerized information which are the property of Proffitt's,
Company or its affiliates.
(g) If any payment, right or benefit provided for in
this Agreement or otherwise paid to Executive by Company or
Proffitt's is treated as an "excess parachute payment" under
Section 280G(b) of the Internal Revenue Code of 1986, as amended,
(the "Code"), Company shall indemnify and hold harmless and make
whole, on an after-tax basis, Executive for any adverse federal tax
consequences, including but not limited to providing to Executive
on an after-tax basis the amount necessary to pay any tax imposed
by Code Section 4999; provided, however, that in determining
whether any adverse federal tax consequences have occurred, the
denial of a tax deduction to Company or Proffitt's with respect to
the amount of a payment made to or other benefit conferred on
Executive shall not be treated as giving rise to an adverse federal
tax consequence with respect to Executive. Company, Proffitt's,
and Executive shall use their reasonable efforts to ensure that any
payments, rights or benefits provided for herein or in connection
with Executive's providing services to Company and Proffitt's are
not treated as excess parachute payments.
5. Non-competition; Unauthorized Disclosure.
(a) Non-competition. During the period Executive is
employed under this Agreement, and for a period of two years
thereafter, Executive:
(i) shall not engage in any activities, whether as
employer, proprietor, partner, stockholder (other than the holder
of less than 5% of the stock of a corporation the securities of
which are traded on a national securities exchange or in the
over-the-counter market), director, officer, employee or otherwise,
on behalf of any retailer which directly competes with Company's
luxury retail business; and.
(ii) shall not induce or attempt to persuade any
employee of Company or any of its divisions, subsidiaries or then
present affiliates to terminate their employment relationship.
(b) Unauthorized Disclosure. During the period
Executive is employed under this Agreement, and for a further
period of two years thereafter, Executive shall not, except as
required by any court or administrative agency, without the written
consent of the Board, or a person authorized thereby, disclose to
any person, other than an employee of Company or Proffitt's, or a
person to whom disclosure is reasonably necessary or appropriate in
connection with the performance by Executive of his duties as an
executive for Company, any confidential information obtained while
in the employ of Company; provided, however, that confidential
information shall not include any information now known or which
becomes known generally to the public (other than as a result of
unauthorized disclosure by Executive).
(c) Scope of Covenants; Remedies. The following
provisions shall apply to the covenants of Executive contained in
this Section 5:
(i) the covenants contained in paragraph 5(a)shall
be limited to the markets in which Company or its subsidiaries are
actively engaged in the conduct of a luxury retail business at the
time of Executive's termination of employment;
(ii) without limiting the right of Company to pursue
all other legal and equitable remedies available for violation by
Executive of the covenants contained in this Section 5, it is
expressly agreed by Executive and Company that such other remedies
cannot fully compensate Company for any such violation and that
Company shall be entitled to injunctive relief to prevent any such
violation or any continuing violation thereof.
(iii) each party intends and agrees that if, in any
action before any court or agency legally empowered to enforce the
covenants contained in this Section 5, any term, restriction,
covenant or promise contained therein is found to be unreasonable
and accordingly unenforceable, then such term, restriction,
covenant or promise shall be deemed modified to the extent
necessary to make it enforceable by such court or agency; and
(iv) the covenants contained in this Section 5 shall
survive the conclusion of Executive's employment by Company.
6. General Provisions.
(a) Notices. Any notice to be given hereunder maybe
effected in writing by personal delivery, mail, overnight courier,
or facsimile. Notices shall be addressed to the parties at the
addresses set forth below, but each party may change his or its
address by written notice in accordance with this Section 6(a).
Notices shall be deemed communicated as of the actual receipt or
refusal of receipt.
If to Executive: Philip B. Miller
Saks Fifth Avenue
12 East Fifth Avenue
New York, NY 10017
If to Company
or Proffitt's: Office of the General Counsel
750 Lakeshore Parkway
Birmingham, AL 35211
(b) Partial Invalidity. If any provision in this
Agreement is held by a court of competent jurisdiction to be
invalid, void or unenforceable, the remaining provisions shall,
nevertheless, continue in full force and without being impaired or
invalidated in any way.
(c) Governing Law. This Agreement shall be governed by
and construed in accordance with the laws of the State of New York.
(d) Entire Agreement. Except for any prior grants of
options, restricted stock, or other forms of incentive compensation
evidenced by a written instrument or by an action of Company's
Board or Proffitt's Board, and except for Proffitt's and Company's
obligations pursuant to Section 5.13 of the Merger Agreement (which
is incorporated herein by reference), this Agreement supersedes any
and all other agreements, either oral or in writing, between the
parties hereto with respect to employment of Executive by Company
and contains all of the covenants and agreements between the
parties with respect to such employment. Each party to this
Agreement acknowledges that no representations, inducements or
agreements, oral or otherwise, that have not been embodied herein,
and no other agreement, statement or promise not contained in this
Agreement, shall be valid or binding. Any modification of this
Agreement will be effective only if it is in writing signed by the
party to be charged.
(e) Indemnification. To the fullest extent permitted by
law, Company and Proffitt's shall indemnify Executive (including
the advancement of expenses) for any judgments, fines, amounts paid
in settlement and reasonable expenses, including attorneys' fees,
incurred by Executive in connection with the defense of any lawsuit
or other claim to which he is made a party by reason of being an
officer, director or employee of Company or Proffitt's or any of
their affiliates during the term of this Agreement. For a period
of at least six years after cessation of Executive's employment
hereunder, Company and Proffitt's shall make every reasonable
effort to maintain customary director and officer liability
insurance covering Executive for acts and omissions during
Executive's employment. Any termination of Executive's employment
or of this Agreement shall have no effect on the continuing
operation of this Section 6(e).
(f) No Mitigation. Executive shall not be obligated to
seek other employment or take any other action byway of mitigation
of the amounts payable to Executive under any of the provisions of
this Agreement and such amounts shall not be reduced whether or not
Executive obtains other employment.
(g) Headings. The Section, paragraph, and subparagraph
headings are for convenience or reference only and shall not define
or limit the provisions hereof.
(h) Attorney's Fees. Company agrees to pay or promptly
reimburse Executive for all reasonable costs and expenses
(including all reasonable legal fees and expenses)which Executive
may reasonably incur in connection with any action or proceeding
relating to the validity or enforceability of, or liability under,
any provision of this Agreement(including as a result of any claim
by Executive regarding the amounts of any payment pursuant to this
Agreement), in which Executive materially prevails.
(i) Successors, etc. This Agreement is personal to
Executive and without the prior written consent of Company shall
not be assignable by Executive otherwise than by will or the laws
of descent and distribution. This Agreement shall inure to the
benefit of and be enforceable by Executive's legal representatives.
This Agreement shall inure to the benefit of and be binding upon
Company, Proffitt's, and their respective successors and assigns.
Company and Proffitt's shall each require any successor (whether
direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of their business and/or
assets to assume expressly and agree to perform this Agreement in
the same manner and to the same extent that Company or Proffitt's
would be required to perform it if no such succession had taken
place.
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first written above.
PROFFITT'S, INC.
By: _____________________
Brian J. Martin
Executive Vice President
SAKS HOLDINGS, INC.
By:______________________
Joan F. Krey
_________________________
Philip B. Miller
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Supplemental Condensed Consolidated Balance Sheets as of August 1, 1998 and
August 2, 1997 and the Supplemental Consolidated Balance Sheets as of January
31, 1998 and February 1, 1997 and the Supplemental Condensed Consolidated
Statements of Income for the six months ended August 1, 1998 and August 2, 1998
and the Supplemental Consolidated Statements of Income for the fiscal years
January 31, 1998 and February 1, 1997 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS 12-MOS 12-MOS
<FISCAL-YEAR-END> JAN-30-1999 JAN-31-1998 JAN-31-1998 FEB-01-1997
<PERIOD-END> AUG-01-1998 AUG-02-1997 JAN-31-1998 FEB-01-1997
<CASH> 31,411,000 43,378,000 50,864,000 76,955,000
<SECURITIES> 0 0 0 0
<RECEIVABLES> 137,418,000 367,529,000 412,209,000 395,028,000
<ALLOWANCES> 0 0 0 0
<INVENTORY> 1,369,498,000 1,189,870,000 1,244,682,000 1,068,184,000
<CURRENT-ASSETS> 1,687,837,000 1,729,996,000 1,891,190,000 1,666,511,000
<PP&E> 1,822,735,000 1,598,893,000 1,725,979,000 1,518,342,000
<DEPRECIATION> 0 0 0 0
<TOTAL-ASSETS> 4,157,139,000 3,769,435,000 4,270,253,000 3,630,276,000
<CURRENT-LIABILITIES> 758,295,000 730,039,000 800,886,000 714,759,000
<BONDS> 1,270,482,000 1,455,249,000 1,393,828,000 1,386,048,000
0 0 0 0
0 0 0 0
<COMMON> 14,314,000 10,830,000 14,148,000 10,776,000
<OTHER-SE> 1,985,525,000 1,417,702,000 1,930,381,000 1,387,158,000
<TOTAL-LIABILITY-AND-EQUITY> 4,157,139,000 3,769,435,000 4,270,253,000 3,630,276,000
<SALES> 2,696,346,000 2,490,469,000 5,726,346,000 4,926,862,000
<TOTAL-REVENUES> 2,696,346,000 2,490,469,000 5,726,346,000 4,926,862,000
<CGS> 1,761,420,000 1,636,809,000 3,731,293,000 3,208,989,000
<TOTAL-COSTS> 0 0 0 0
<OTHER-EXPENSES> 831,378,000 760,194,000 1,659,557,000 1,458,416,000
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 49,292,000 57,497,000 113,685,000 114,881,000
<INCOME-PRETAX> 54,256,000 35,969,000 221,811,000 144,576,000
<INCOME-TAX> 23,150,000 15,505,000 (194,426,000) 50,998,000
<INCOME-CONTINUING> 31,106,000 20,464,000 416,237,000 93,578,000
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 334,000 4,472,000 11,323,000 12,746,000
<CHANGES> 0 0 0 0
<NET-INCOME> 30,772,000 15,992,000 404,914,000 77,004,000
<EPS-PRIMARY> .22 .12 2.94 .62
<EPS-DILUTED> .21 .12 2.79 .60
</TABLE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the
registration statement of Saks Incorporated listed below of our
report dated March 19, 1998, except for Notes 1, 3, 4, 9, 11 and 13
as to which the date is September 17, 1998, on our audits of the
supplemental consolidated financial statements of Saks Incorporated
and Subsidiaries as of January 31, 1998 and February 1, 1997, and
for the three years ended January 31, 1998, which report is
included in this Form 8-K.
Registration Statements on Form S-3
Registration Numbers:
333-32257
333-55805
Registration Statements on Form S-4
Registration Numbers:
333-09043
333-41563
333-60123
Registration Statements on Form S-8
Registration Numbers:
33-46306
33-80602
33-88390
333-25213
333-47535
September 23, 1998 PriceWaterhousCoopers,
L.L.P.
