-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AZ9auj8pR7JbEx68DnZwaCi/9yI66sYbPvQTcSat5mkwYLwDVLbD2Y6cgsn7FBsK n7w8o+9NHHR89shRLbQdHw== 0000063416-04-000119.txt : 20040920 0000063416-04-000119.hdr.sgml : 20040920 20040920161447 ACCESSION NUMBER: 0000063416-04-000119 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20040920 ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20040920 DATE AS OF CHANGE: 20040920 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MAY DEPARTMENT STORES CO CENTRAL INDEX KEY: 0000063416 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-DEPARTMENT STORES [5311] IRS NUMBER: 431104396 STATE OF INCORPORATION: DE FISCAL YEAR END: 0201 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-00079 FILM NUMBER: 041037684 BUSINESS ADDRESS: STREET 1: 611 OLIVE ST CITY: ST LOUIS STATE: MO ZIP: 63101 BUSINESS PHONE: 3143426300 8-K/A 1 eightka.txt FORM 8KA DATED SEPTEMBER 20, 2004 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------------------- FORM 8-K/A CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report - September 20, 2004 Date of Earliest Event Reported - July 30, 2004 THE MAY DEPARTMENT STORES COMPANY (Exact name of Registrant as specified in its charter) Delaware I-79 43-1104396 (State or other (Commission (IRS Employer jurisdiction of File Number) Identification No.) incorporation) 611 Olive Street, St. Louis, Missouri 63101 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (314)342-6300 Not Applicable (former name or former address, if changed since last report) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligations of the registrant under any of the following provisions (See General Instruction A.2. below): [ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) [ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) [ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) [ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) This report on Form 8-K/A amends and supplements the report on Form 8-K filed by The May Department Stores Company on August 2, 2004 in connection with the acquisition of the Marshall Field's department store group from Target Corporation. The report on Form 8-K dated August 2, 2004 is being amended to include the unaudited and audited financial statements of Marshall Field's required by Item 9.01 (a) and the pro forma financial information required by Item 9.01 (b). Item 9.01 Financial Statements and Exhibits. Item 9.01 (a) is hereby amended and supplemented as follows: (a) Financial statements of business acquired. The unaudited condensed financial statements of Marshall Field's required by Item 9.01 (a) of Form 8-K for the thirteen weeks ended May 1, 2004 is set forth as exhibit 99.2 to this amendment to the report on 8-K dated August 2, 2004, which exhibit is incorporated herein by reference. The audited financial statements of Marshall Field's required by Item 9.01 (a) of Form 8-K for the year ended January 31, 2004 is set forth as Exhibit 99.3 to this amendment to the report on 8-K dated August 2, 2004, which exhibit is incorporated herein by reference. Item 9.01 (b) is hereby amended and supplemented as follows: (b) Pro forma financial information. The unaudited pro forma financial information required by Item 9.01 (b) of Form 8-K for the thirteen weeks ended May 1, 2004 and the year ended January 31, 2004 is set forth as Exhibit 99.4 to this amendment to the report on Form 8-K dated August 2, 2004, which exhibit is hereby incorporated by reference. Item 9.01 (c) is hereby amended and supplemented as follows: (c) Exhibits. Exhibit No. Exhibit 23.1 Consent of Ernst & Young LLP. 99.1* Press Release, dated July 30, 2004. 99.2 Unaudited condensed financial statements of Marshall Field's for the thirteen weeks ended May 1, 2004 99.3 Audited financial statements of Marshall Field's for the year ended January 31, 2004. 99.4 Unaudited pro forma financial information for the thirteen weeks ended May 1, 2004 and the year ended January 31, 2004. * Previously filed. SIGNATURE 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. THE MAY DEPARTMENT STORES COMPANY Dated: September 20, 2004 By: /s/ Richard A. Brickson Richard A. Brickson Secretary EX-23.1 2 exhibit231.txt CONSENT OF ERNST & YOUNG LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the use of our report dated July 23, 2004 on the statement of financial position of Marshall Field's as of January 31, 2004, and the related results of operations, statement of cash flows and shareholder's investment for the year ended January 31, 2004, included in this Form 8-K. We also consent to the incorporation by reference of our report included in this Form 8-K into the Registration Statement Nos. 333-59792, 333-76227, 333-00957, 333-103352 and 333-111987 on Form S-8 and Registration Statement Nos. 333-42940 and 333-42940-1 on Form S-3 of The May Department Stores Company and subsidiaries. /s/ Ernst & Young LLP Ernst & Young LLP Minneapolis, Minnesota September 17, 2004 EX-99.1 3 exhibit991.txt PRESS RELEASE, DATED JULY 30, 2004 Exhibit 99.1 THE MAY DEPARTMENT STORES COMPANY ANNOUNCES COMPLETION OF ITS ACQUISITION OF MARSHALL FIELD'S ST. LOUIS, July 30, 2004 - The May Department Stores Company [NYSE: MAY] announced today that its previously announced acquisition of the Marshall Field's department store group from Target Corporation will be effective at 11:59 p.m., July 31, 2004. The acquisition includes substantially all of the assets that comprise Marshall Field's, including 62 stores, inventory, customer receivables, and distribution centers. As part of the transaction, May also is acquiring the real estate associated with nine Mervyn's store locations in the Twin Cities area. The transfer of these stores is expected to occur during the third quarter of 2004. The Marshall Field's acquisition is being financed through $2.2 billion of long-term debt and $1.0 billion of short-term borrowings and cash on hand. Effective with the closing of the Marshall Field's transaction, The May Department Stores Company will operate 497 department stores under the names of Famous-Barr, Filene's, Foley's, Hecht's, Kaufmann's, Lord & Taylor, L.S. Ayres, Marshall Field's, Meier & Frank, Robinsons-May, Strawbridge's, and The Jones Store, as well as 220 David's Bridal stores, 454 After Hours Formalwear stores, and 10 Priscilla of Boston stores in its Bridal Group. May operates in 46 states, the District of Columbia, and Puerto Rico. # # # EX-99.2 4 exhibit992.txt UNAUDITED CONDENSED FINANCIAL STATEMENTS OF MARSHALL FIELD'S FOR THE THIRTEEN WEEKS ENDED MAY 1, 2004 Exhibit 99.2 Unaudited Condensed Financial Statements Marshall Field's Thirteen Weeks Ended May 1, 2004 Marshall Field's Unaudited Condensed Financial Statements Thirteen Weeks Ended May 1, 2004 Contents Condensed Financial Statements Results of Operations..................................................1 Statement of Financial Position........................................2 Statements of Cash Flows...............................................3 Notes to Financial Statements..........................................4 Marshall Field's Results of Operations (Unaudited) (in thousands) 13 Weeks Ended May 1, 2004 May 3, 2003 Sales $ 583,887 $ 557,746 Net credit card revenues 29,809 32,213 Total revenues 613,696 589,959 Cost of sales 334,390 330,194 Selling, general and administrative expense 229,989 208,993 Depreciation and amortization 28,750 29,393 Interest expense 11,590 12,793 Earnings before income taxes 8,977 8,586 Provision for income taxes 3,378 3,263 Net earnings $ 5,599 $ 5,323 See accompanying notes. 1 Marshall Field's Statement of Financial Position May 1, 2004 (in thousands) Assets Current assets: Cash and cash equivalents $ 25,672 Accounts receivable, net 596,060 Inventory 363,001 Deferred taxes and other 64,450 Total current assets 1,049,183 Property and equipment Land 104,581 Buildings and improvements 786,419 Fixtures and equipment 569,654 Construction in progress 4,723 Accumulated depreciation (622,018) Property and equipment, net 843,359 Due from affiliate 1,383,409 Prepaid pension and other 231,397 Total assets $ 3,507,348 Liabilities and shareholder's investment Current liabilities: Accounts payable $ 256,386 Accrued liabilities 160,954 Income taxes payable 15,370 Current portion of capital leases 929 Total current liabilities 433,639 Note payable to affiliate 948,325 Capital leases, net of current portion 8,720 Deferred taxes and other long-term liabilities 185,201 Shareholder's investment: Common stock 2 Additional paid-in capital 13,193 Retained earnings 1,918,268 Total shareholder's investment 1,931,463 Total liabilities and shareholder's investment $ 3,507,348 See accompanying notes. 2 Marshall Field's Statements of Cash Flows (Unaudited) (in thousands) 13 Weeks Ended May 1, 2004 May 3, 2003 Operating activities Net earnings $ 5,599 $ 5,323 Reconciliation to cash flow: Depreciation and amortization 28,750 29,393 Bad debt provision 5,405 8,741 Deferred tax provision (603) (621) Loss on disposal of fixed assets, net 67 392 Other non-cash items affecting earnings (837) 2,014 Changes in operating accounts providing cash: Accounts receivable 45,567 72,793 Inventory (37,597) (13,548) Other current assets 5,890 18 Other assets 1,003 (9,600) Due from affiliate (53,744) (125,123) Accounts payable 65,736 67,779 Accrued liabilities (61,954) (86,995) Income taxes payable 29,774 54,091 Cash flow provided by operating activities 33,056 4,657 Investing activities Expenditures for property and equipment (13,974) (21,822) Proceeds from disposals of property and equipment 16 17,693 Cash flow required for investing activities (13,958) (4,129) Financing activities Dividends (9,032) (1,580) Reductions of capital leases (220) (202) Cash flow required for financing activities (9,252) (1,782) Net increase (decrease) in cash and cash equivalents 9,846 (1,254) Cash and cash equivalents at beginning of year 15,826 22,234 Cash and cash equivalents at end of period $ 25,672 $ 20,980 See accompanying notes. 3 Marshall Field's Notes to Condensed Financial Statements Interim Results The unaudited condensed financial statements have been prepared in accordance with the regulations set out by the Securities and Exchange Commission and should be read in conjunction with the Notes to Financial Statements in the 2003 audited financial statements. In the opinion of management, this information is fairly presented and all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the results for the interim periods have been included; however, certain items are included in these statements based on estimates for the entire year. Operating results of periods, which exclude the Christmas season, may not be indicative of the operating results that may be expected for the fiscal year. Accounts Receivable Accounts receivable are recorded net of an allowance for expected losses. The allowance, recognized in an amount equal to the anticipated future write-offs based on delinquencies, risk scores, aging trends, industry risk trends and historical experience, was $25 million at May 1, 2004. Inventory Inventory and the related cost of sales are accounted for under the retail inventory accounting method using the last-in, first-out (LIFO) basis. Inventory is stated at the lower of LIFO cost or market. There was no change in the cumulative LIFO provision during the first quarter of 2003 and 2004. 4 Marshall Field's Notes to Condensed Financial Statements Stock Option Plans Certain key employees participate in Target Corporation stock option plans. These long-term incentive plans provide for the granting of stock options and performance share awards or a combination of awards which are granted in Target Corporation common stock. A majority of the awards are non-qualified stock options that vest annually in equal amounts over a four-year period. These options expire no later than ten years after the date of grant. Performance share awards are issuable in the future based upon the attainment of specified levels of future financial performance of Target Corporation as a whole. Awards granted to key employees under the Target Corporation stock option plan are accounted for using the fair-value-based method to record stock-based compensation. Stock-based compensation expense for the first quarter of 2004 and 2003 was $2 million. Pension and Postretirement Health Care Benefits The company has qualified defined benefit pension plans that cover all employees who meet certain age, length of service and hours worked per year requirements. The company also has unfunded non-qualified pension plans for employees who have qualified plan compensation restrictions. Benefits are provided based upon years of service and the employee's compensation. Retired employees also become eligible for certain health care benefits if they meet minimum age and service requirements and agree to contribute a portion of the cost. 5 Marshall Field's Notes to Condensed Financial Statements Net pension and postretirement health care benefits expense for the thirteen weeks ended May 1, 2004 was: Postretirement Pension Health Care Benefits Benefits (In Thousands) Service cost benefits earned during the period $2,560 $ 101 Interest cost on projected benefit obligation 4,003 1,201 Expected return on assets (6,123) - Recognized losses 869 - Recognized prior service cost (238) 96 Total $1,071 $ 1,398 The amortization of any prior service cost is determined using a straight-line amortization of the cost over the average remaining service period of employees expected to receive benefits under the plan. Subsequent Events Subsequent to May 1, 2004, Target Corporation reached an agreement to sell substantially all of the operating assets of Marshall Field's to The May Department Stores Company for approximately $3.2 billion in cash. The sale occurred during the second quarter of fiscal year 2004. 6 EX-99.3 5 exhibit993.txt AUDITED FINANCIAL STATEMENTS OF MARSHALL FIELD'S FOR THE YEAR ENDED JANUARY 31, 2004 Exhibit 99.3 Financial Statements Marshall Field's Year Ended January 31, 2004 Marshall Field's Financial Statements Year Ended January 31, 2004 Contents Report of Independent Auditors.........................................1 Financial Statements Results of Operations..................................................2 Statement of Financial Position........................................3 Statement of Cash Flows................................................4 Statement of Shareholder's Investment..................................5 Notes to Financial Statements..........................................6 Report of Independent Auditors Target Corporation We have audited the accompanying statement of financial position of Marshall Field's as of January 31, 2004 and the related results of operations, cash flows and shareholder's investment for the year ended January 31, 2004. These financial statements are the responsibility of Marshall Field's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Marshall Field's at January 31, 2004 and the results of its operations and its cash flows for the period ended January 31, 2004, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Minneapolis, Minnesota July 23, 2004 1 Marshall Field's Results of Operations (In Thousands) Year Ended January 31, 2004 Sales $2,458,660 Net credit card revenues 125,464 Total revenues 2,584,124 Cost of sales 1,428,512 Selling, general and administrative expense 861,885 Credit card expense 48,436 Depreciation and amortization 115,715 Interest expense 47,225 Earnings before income taxes 82,351 Provision for income taxes 31,494 Net earnings $ 50,857 See accompanying notes. 2 Marshall Field's Statement of Financial Position (In Thousands) January 31, 2004 Assets Current assets: Cash and cash equivalents $ 15,826 Accounts receivable, net 647,032 Inventory 325,404 Income taxes receivable 14,404 Deferred taxes and other 70,340 Total current assets 1,073,006 Property and equipment Land 104,553 Buildings and improvements 790,594 Fixtures and equipment 594,632 Construction in progress 11,222 Accumulated depreciation (643,982) Property and equipment, net 857,019 Due from affiliate 1,329,913 Prepaid pension and other 233,351 Total assets $3,493,289 Liabilities and shareholder's investment Current liabilities: Accounts payable $ 190,650 Accrued liabilities 222,908 Current portion of capital leases 833 Total current liabilities 414,391 Note payable to affiliate 948,325 Capital leases, net of current portion 9,036 Deferred taxes and other long-term liabilities 188,190 Shareholder's investment: Common stock 2 Additional paid-in capital 11,645 Retained earnings 1,921,700 Total shareholder's investment 1,933,347 Total liabilities and shareholder's investment $3,493,289 See accompanying notes. 3 Marshall Field's Statement of Cash Flows (In Thousands) Year Ended January 31, 2004 Operating activities Net earnings $ 50,857 Reconciliation to cash flow: Depreciation and amortization 115,715 Bad debt provision 23,820 Deferred tax provision 21,592 Loss on disposal of fixed assets, net 3,916 Other non-cash items affecting earnings (853) Changes in operating accounts providing cash: Accounts receivable 35,837 Inventory (3,538) Income taxes receivable 34,204 Other current assets (3,252) Other assets (17,145) Due from affiliate (137,111) Accounts payable 33,339 Accrued liabilities (36,495) Cash flow provided by operating activities 120,886 Investing activities Expenditures for property and equipment (131,733) Proceeds from disposals of property and equipment 17,725 Cash flow required for investing activities (114,008) Financing activities Dividends (12,453) Reductions of capital leases (833) Cash flow required for financing activities (13,286) Net decrease in cash and cash equivalents (6,408) Cash and cash equivalents at beginning of year 22,234 Cash and cash equivalents at end of year $ 15,826 See accompanying notes. 4 Marshall Field's Statement of Shareholder's Investment (In Thousands) Additional Common Paid-In Retained Stock Capital Earnings Total February 1, 2003 $2 $ 5,079 $1,883,296 $1,888,377 Net earnings - - 50,857 50,857 Stock options - 6,566 - 6,566 Dividends - - (12,453) (12,453) January 31, 2004 $2 $11,645 $1,921,700 $1,933,347 See accompanying notes. 5 Marshall Field's Notes to Financial Statements January 31, 2004 Summary of Accounting Policies Organization Marshall Field's, an operating segment of Target Corporation, is a traditional department store that emphasizes fashion leadership, quality merchandise and superior guest service. It is headquartered in Minneapolis, operates 62 stores and employs approximately 25,000 team members in 8 states in the upper Midwest. Marshall Field's offers credit to qualified guests through a proprietary store brand credit card program. Marshall Field's credit card operations drive revenue growth and are considered an integral component of our retail operations. Consolidation The financial statements include the balances of Marshall Field's and related liquor licensing entities (collectively, Marshall Field's) after elimination of material intercompany balances and transactions. The liquor entities are wholly owned subsidiaries of Target Corporation. Use of Estimates The preparation of our financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results may differ from those estimates. Fiscal Year Our fiscal year ends on the Saturday nearest January 31. Unless otherwise stated, references to year in this report relate to fiscal year rather than to calendar year. Fiscal year 2003 consisted of 52 weeks. Revenues Revenue from retail sales is recognized at the time of sale. Net credit card revenues are comprised of finance charges and late fees from Marshall Field's proprietary credit card holders. Net credit card revenues are recognized according to the contractual provisions of the credit card agreement. If an account is written off, any uncollected finance charges or late fees are recorded as a reduction of credit card revenue. The amount of our retail sales charged to our credit cards was $1 billion in 2003. 6 Marshall Field's Notes to Financial Statements (continued) Consideration Received From Vendors We collect consideration from our vendors (referred to as "vendor income") primarily as a result of our promotional, advertising and compliance programs. Promotional and advertising allowances are intended to offset our costs of promoting and selling the vendors' merchandise in our stores and are recognized when we incur the cost or complete the promotion. Under our compliance programs, vendors are charged for merchandise shipments that do not meet our requirements, such as late or incomplete shipments. We record these allowances when the violation occurs. In the first quarter of 2003, we adopted Emerging Issues Task Force (EITF) Issue No. 02-16, Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor. Under the new guidance, cash consideration received from a vendor is presumed to be a reduction of the prices of the vendor's products or services and should be classified as a reduction in cost of sales. If the cash consideration is for assets or services delivered to the vendor, it should be characterized as revenue. If the cash consideration is a reimbursement of costs incurred to sell the vendor's products, it should be characterized as a reduction of that cost. Due to the adoption of EITF Issue No. 02-16, certain vendor income items are classified as inventory purchases and recognized into income as the vendor's merchandise is sold. This treatment had no material impact on sales, cash flows or financial position for any period and had a positive impact of $1 million on pretax net earnings in 2003. As required by EITF Issue No. 02-16, the guidance was applied on a prospective basis only. In 2003, we classified certain vendor income as inventory purchases that would have been classified as selling, general and administrative expense prior to the adoption of EITF Issue No. 02-16 as it did not meet the specific, incremental or identifiable criteria specified in the new guidance. Buying and Occupancy Expenses Buying expenses primarily consist of salaries and expenses incurred by our merchandising operations, while our occupancy expenses primarily consist of rent, depreciation, property taxes and other operating costs of our retail and distribution facilities. Buying and occupancy expenses classified in selling, general and administrative expenses were $139 million in 2003. In addition, we recorded $85 million of depreciation expense for our retail and distribution facilities in 2003. 7 Marshall Field's Notes to Financial Statements (continued) Advertising Costs Advertising costs, included in selling, general and administrative expense, are expensed as incurred and were $133 million for 2003. Advertising vendor income recorded within advertising expense was approximately $20 million in 2003. Accounts Receivable Accounts receivable are recorded net of an allowance for expected losses. The allowance, recognized in an amount equal to the anticipated future write-offs based on delinquencies, risk scores, aging trends, industry risk trends and our historical experience, was $25 million at January 31, 2004. Inventory Our inventory and the related cost of sales are accounted for under the retail inventory accounting method using the last-in, first-out (LIFO) basis. Inventory is stated at the lower of LIFO cost or market. In 2003, Marshall Field's inventory balance was $325 million. In 2003, we reduced our cumulative LIFO provision from $39 million to $24 million. Property and Equipment Property and equipment are recorded at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over estimated useful lives. Depreciation expense for 2003 was $112 million. Accelerated depreciation methods are generally used for income tax purposes. Repair and maintenance costs were $25 million in 2003. Estimated useful lives by major asset category are as follows: Buildings and improvements 8-39 years Fixtures and equipment 4-15 years Computer hardware and software 4 years Property and equipment include an allocation of common assets from Target Corporation. The gross and net book values of these assets were $126 million and $47 million, respectively, at January 31, 2004. 8 Marshall Field's Notes to Financial Statements (continued) We follow Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which requires companies to review long-lived assets when events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. In accordance with this guidance, all long-lived assets are reviewed when events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. We review most assets at the store level, which is the lowest level of assets for which there are identifiable cash flows. The carrying amount of the store assets is compared to the expected undiscounted future cash flows to be generated by those assets over the estimated remaining useful life of the primary asset. Cash flows are projected for each store based upon historical results and expectations. In cases where the expected future cash flows and fair value are less than the carrying amount of the assets, those stores are considered impaired, and the assets are written down to fair value. Fair value is based on appraisals or other reasonable methods to estimate fair value. Impairment losses are included in depreciation expense for held and used assets and are included within selling, general and administrative expense on assets classified as held for sale. Our fixed asset impairment tests, performed in accordance with the applicable accounting guidance, assumed our business would continue indefinitely. Changes in these assumptions could impact the results of our analysis. We did not record an impairment loss for stores classified as held for use in 2003. Intangible Assets Intangible assets are recorded within other long-term assets at cost less accumulated amortization. Amortization is computed on intangible assets with definite useful lives using the straight-line method over estimated useful lives that range from 3 to 15 years. Amortization expense for 2003 was $4 million. At January 31, 2004, net goodwill and intangible assets were $110 million. These assets included $95 million of goodwill and intangible assets with indefinite useful lives. Discounted cash flow models were used in determining fair value for the purposes of the required annual goodwill impairment analysis. Management used other market data to validate the results of our analysis. No impairments were recorded in 2003 as a result of the tests performed. 9 Marshall Field's Notes to Financial Statements (continued) Accounts Payable Our accounting policy is to reduce accounts payable when checks to vendors clear the bank from which they were drawn. Outstanding checks included in accounts payable were $50 million at January 31, 2004. Commitments and Contingencies At January 31, 2004, our debt, lease and royalty contractual obligations were as follows: Payments Due by Period Less Than After 5 Total 1 Year 1-3 Years 3-5 Years Years (In Thousands) Long-term debt* $ 948,325 $ - $ - $ - $948,325 Capital lease obligations** 13,412 1,717 3,470 3,640 4,585 Operating leases** 37,304 4,450 9,398 7,705 15,751 Royalties 4,713 2,163 2,550 - - Contractual cash obligations $1,003,754 $8,330 $15,418 $11,345 $968,661 * Required principal payments only. ** Total contractual lease payments. Commitments for the purchase, construction, lease or remodeling of real estate, facilities and equipment were approximately $5 million at January 31, 2004. Throughout the year, we enter into various commitments to purchase inventory. In addition to the accounts payable reflected in our statement of financial position, we had commitments with various vendors for the purchase of inventory as of January 31, 2004. These purchase commitments are cancelable by their terms. The above table excludes these commitments. 10 Marshall Field's Notes to Financial Statements (continued) We are exposed to claims and litigation arising out of the ordinary course of business and use various methods to resolve these matters in a manner that serves the best interest of our shareholder and other constituents. The dispute resolution methods that we use include vigorous litigation, when necessary, and alternatives such as settlement discussions, where appropriate, to reduce the costs of litigation. Our policy is to fully disclose pending lawsuits and other known claims that we expect may have a material impact on our results of operations or financial position. However, management, after consulting with legal counsel, does not believe the currently identified claims and litigation meet this criterion. Leases Assets held under capital leases are included in property and equipment and are charged to depreciation and interest over the life of the lease. Operating leases are not capitalized and lease rentals are expensed. Rent expense on buildings, classified in selling, general and administrative expense, includes percentage rents that are based on a percentage of retail sales over stated levels. Total rent expense was $5 million in 2003. Most of the long-term leases include options to renew, with terms varying from 1 to 30 years. Certain leases also include options to purchase the property. Future minimum lease payments required under noncancelable lease agreements existing at January 31, 2004 were: Operating Capital Leases Leases (In Thousands) 2004 $ 4,450 $ 1,717 2005 4,906 1,718 2006 4,492 1,752 2007 3,978 1,820 2008 3,727 1,820 After 2008 15,751 4,585 Total future minimum lease payments $37,304 13,412 Less interest (3,543) Present value of minimum lease payments (includes current portion of $1 million) $ 9,869 11 Marshall Field's Notes to Financial Statements (continued) Income Taxes Marshall Field's is included in the consolidated federal income tax return filed for Target Corporation and its subsidiaries. Marshall Field's tax provision was determined by applying Target Corporation's tax rates to Marshall Field's income and allowing for Marshall Field's tax credits. Reconciliation of tax rates is as follows: 2003 Federal statutory rate 35.0% State income taxes, net of federal tax benefit 2.9 Work opportunity tax credits (0.4) Other 0.7 Effective tax rate 38.2% The components of the provision for income taxes were: Income Tax Provision: Expense (In Thousands) 2003 Current: Federal $ 8,658 State 1,244 9,902 Deferred: Federal 19,132 State 2,460 21,592 Total $31,494 12 Marshall Field's Notes to Financial Statements (continued) The components of the net deferred tax assets/(liabilities) were: Net Deferred Tax Assets/(Liabilities) (In Thousands) January 31, 2004 Gross deferred tax assets: Self-insured benefits $ 11,744 Deferred compensation 12,177 Inventory 13,904 Accounts receivable valuation allowance 9,428 Postretirement health care obligation 31,586 Other 23,171 102,010 Gross deferred tax liabilities: Property and equipment (74,359) Pension (46,407) Other (32,888) (153,654) Total $ (51,644) Other Long-Term Liabilities In addition to the deferred taxes discussed above, the major components of other long-term liabilities at January 31, 2004 includes obligations for worker's compensation and general liability costs and retiree medical expenses. 13 Marshall Field's Notes to Financial Statements (continued) Stock Option Plans Certain key employees participate in Target Corporation stock option plans. These long-term incentive plans provide for the granting of stock options and performance share awards or a combination of awards which are granted in Target Corporation common stock. A majority of the awards are non-qualified stock options that vest annually in equal amounts over a four-year period. These options expire no later than ten years after the date of grant. Performance share awards are issuable in the future based upon the attainment of specified levels of future financial performance of Target Corporation as a whole. Awards granted to key employees under the Target Corporation stock option plan are accounted for using the fair-value-based method to record stock-based compensation. Stock-based compensation expense for 2003 was $7 million. Marshall Field's Participants Options and Performance Share Awards Outstanding Performance Options Shares Total Outstanding Currently Exercisable Number of Average Number of Average Potentially Options Price* Options Price* Issuable (Options and shares in thousands) February 1, 2003 4,375 $25.48 2,912 $21.19 46 Granted 493 38.52 51 Canceled (55) 35.15 Exercised (468) 11.19 January 31, 2004 4,345 $28.38 2,966 $25.06 97 14 Marshall Field's Notes to Financial Statements (continued) Options Outstanding Options Outstanding Currently Exercisable Range of Number Average Average Number Average Exercise Prices Outstanding Life** Price* Exercisable Price* (Options in thousands) $ 5.81 - $ 9.99 537 2.7 $ 8.64 537 $ 8.64 $10.00 - $19.99 573 4.0 17.30 573 17.30 $20.00 - $29.99 539 5.0 26.38 539 26.38 $30.00 - $39.99 2,254 7.9 33.94 1,118 33.49 $40.00 - $41.16 442 8.1 40.84 199 40.80 Total 4,345 6.4 $28.38 2,966 $25.06 * Weighted average exercise price. ** Weighted average contractual life remaining in years. The Black-Scholes model was used to estimate the fair value of the options at grant date based on the following assumptions: 2003 Dividend yield 0.8% Volatility 29.0% Risk-free interest rate 3.0% Expected life in years 5.0 Weighted average fair value at grant date $11.21 Defined Contribution Plans Employees who meet certain eligibility requirements can participate in Target Corporation's defined contribution 401(k) plan by investing up to 80% of their compensation. We match 100% of each employee's contribution up to 5% of respective total compensation. Our contribution to the plan is initially invested in Target Corporation common stock. Benefits expense related to these matching contributions was $14 million in 2003. 15 Marshall Field's Notes to Financial Statements (continued) In addition, certain employees participate in Target Corporation's other non- qualified, unfunded plans that allow participants who are otherwise limited by qualified plan statutes or regulations to defer compensation and earn returns either tied to the results of the 401(k) plan investment choices or market levels of interest rates. Marshall Field's recognized benefits expense for these non-qualified plans of $2 million in 2003. Pension and Postretirement Health Care Benefits We have qualified defined benefit pension plans that cover all employees who meet certain age, length of service and hours worked per year requirements. We also have unfunded non-qualified pension plans for employees who have qualified plan compensation restrictions. Benefits are provided based upon years of service and the employee's compensation. Retired employees also become eligible for certain health care benefits if they meet minimum age and service requirements and agree to contribute a portion of the cost. The Medicare Prescription Drug, Improvements and Modernization Act of 2003 (the Act) was signed into law in December 2003. The Act introduces a prescription drug benefit under Medicare (Medicare Part D), as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a prescription drug benefit that is at least actuarially equivalent to Medicare Part D. In May 2004, the Financial Accounting Standards Board (FASB) issued Staff Position (FSP) No. 106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003. This FSP is effective for interim or annual periods beginning after June 15, 2004. The accumulated postretirement benefit obligation and the net periodic benefit cost in these financial statements do not reflect the effect of the subsidy because we have not yet concluded whether the benefits provided by our plan are actuarially equivalent to Medicare Part D under the Act. 16 Marshall Field's Notes to Financial Statements (continued) Obligations and Funded Status at October 31, 2003 Change in Benefit Obligation Postretirement Pension Health Care Benefits Benefits (In Thousands) Benefit obligation at beginning of measurement period $335,427 $ 79,563 Service cost 10,778 393 Interest cost 21,755 5,323 Actuarial loss 42,708 1,423 Benefits paid (25,099) (6,443) Benefit obligation at end of measurement period $385,569 $ 80,259 Change in Plan Assets Postretirement Pension Health Care Benefits Benefits (In Thousands) Fair value of plan assets at beginning of measurement period $352,037 $ - Actual return on plan assets 67,217 - Employer contribution 21,894 6,443 Benefits paid (24,623) (6,443) Fair value of plan assets at end of measurement period $416,525 $ - Funded status $ 30,956 $(80,259) Unrecognized actuarial loss/(gain) 104,613 (3,447) Unrecognized prior service cost (12,981) 889 Net amount recognized $122,588 $(82,817) 17 Marshall Field's Notes to Financial Statements (continued) Amounts recognized in the statement of financial position consist of: Postretirement Pension Health Care Benefits Benefits (In Thousands) Prepaid benefit cost $122,588 $ - Accrued benefit cost - (82,817) Net amount recognized $122,588 $(82,817) The accumulated benefit obligation for all defined benefit pension plans was $355 million at October 31, 2003. The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the pension plans with an accumulated benefit obligation in excess of plan assets were $1 million, $1 million and $-0-, respectively, as of October 31, 2003. Net Pension and Postretirement Health Care Benefits Expense Postretirement Pension Health Care Benefits Benefits (In Thousands) Service cost benefits earned during the period $ 10,778 $ 393 Interest cost on projected benefit obligation 21,755 5,323 Expected return on assets (35,552) - Recognized losses 5,545 61 Recognized prior service cost (1,807) 386 Total $ 719 $ 6,163 The amortization of any prior service cost is determined using a straight-line amortization of the cost over the average remaining service period of employees expected to receive benefits under the plan. 18 Marshall Field's Notes to Financial Statements (continued) Assumptions Weighted average assumptions used to determine benefit obligations at October 31, 2003: Postretirement Pension Health Care Benefits Benefits Discount rate 6.25% 6.25% Average assumed rate of compensation increase 3.25 n/a Weighted average assumptions used to determine net periodic benefit cost for the year ended October 31, 2003: Postretirement Pension Health Care Benefits Benefits Discount rate 7.00% 7.00% Expected long-term rate of return on plan assets 8.50 n/a Average assumed rate of compensation increase 4.00 n/a Our rate of return on qualified plans' assets has averaged 5.4% and 9.6% per year over the five-year and ten-year periods ended October 31, 2003 (our measurement date). After that date, we reduced our expected long-term rate of return on plans' assets to 8.0% per year. An increase in the cost of covered health care benefits of 6.0% was assumed for 2003 and 2004. The rate is assumed to remain at 6.0% in the future. The health care cost trend rate assumption may have a significant effect on the amounts reported. 19 Marshall Field's Notes to Financial Statements (continued) A 1% change in assumed health care cost trend rates would have the following effects: 1% 1% Increase Decrease (In Thousands) Effect on total of service and interest cost components of net periodic postretirement health care benefit cost $ 334 $ (315) Effect on the health care component of the postretirement benefit obligation 4,816 (4,575) Additional Information Our pension plan weighted average asset allocations at October 31, 2003 by asset category are as follows: 2003 Asset category Equity securities 56% Debt securities 26 Real estate 5 Other 13 Total 100% Our asset allocation strategy for 2004 targets 55% in equity securities, 25% in debt securities, 5% in real estate and 15% in other assets. Equity securities include Target Corporation common stock in amounts substantially less than 0.5% of total plan assets at October 31, 2003. Other assets include private equity, mezzanine and distressed debt and timber. Our expected long- term rate of return assumptions as of October 31, 2003 are 8.5%, 5.5%, 7.0% and 10.0% for equity securities, debt securities, real estate and other assets, respectively. Contributions Given the qualified pension plans' funded position, we are not required to make any contributions in 2004. In similar situations in the past, we have chosen to make discretionary contributions for various purposes, including minimizing Pension Benefit Guaranty Corporation premium payments and maintaining the fully funded status of the plans. In 2004, such discretionary contributions could range from $-0- to $35 million. We expect to make contributions in the range of $5 million to $10 million to our other postretirement benefit plans in 2004. 20 Marshall Field's Notes to Financial Statements (continued) Estimated Future Benefit Payments The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid: Postretirement Pension Health Care Benefits Benefits (In Thousands) 2004 $ 25,000 $ 6,854 2005 25,000 7,128 2006 25,000 7,413 2007 25,000 7,672 2008 25,000 7,941 2009-2013 125,000 42,730 Related-Party Transactions Note Payable Marshall Field's holds a note payable to Target Corporation for $948 million maturing in 2011 at a rate to be calculated each year that is equal to Target Corporation's interest expense for the fiscal year divided by Target Corporation's average debt outstanding for the fiscal year (4.9% in 2003). Accrued interest at January 31, 2004, was $38 million. Shared Services Certain shared services, such as technology support, finance, assets protection, facility operations, property development and transportation, are provided by Target Corporation. The costs of providing these services are allocated to Marshall Field's without a premium through corporate expense allocation processes. The total expenses charged to Marshall Field's during 2003 were $54 million. These expenses are reflected in selling, general and administrative expenses. 21 Marshall Field's Notes to Financial Statements (continued) In addition to the shared services, Target Corporation pays Marshall Field's employees' health plan, dental plan and life insurance claims and transfers the costs to Marshall Field's. The claim transfers totaled $48 million in 2003. Associated Merchandising Company (AMC), a wholly owned subsidiary of Target Corporation, provides inventory sourcing services to Marshall Field's. During 2003, inventory purchases using AMC sourcing services were $53 million. The amount owed to AMC associated with those purchases was $6 million at January 31, 2004. The above transactions occurred in the normal course of business during the year. Accounting Pronouncements 2004 Adoptions In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51 (FIN 46). FIN 46 will be effective no later than the end of the first reporting period that ends after March 15, 2004. FIN 46 requires the consolidation of entities in which an enterprise absorbs a majority of the entity's expected losses, receives a majority of the entity's expected residual returns, or both, as a result of ownership, contractual or other financial interest in the entity. Currently, entities are generally consolidated by an enterprise when it has a controlling financial interest through ownership of a majority voting interest in the entity. We do not expect the adoption of FIN 46 to have a material impact on our net earnings, cash flows or financial position. 2003 Adoptions In the first quarter of 2003, we adopted SFAS No. 143, Accounting for Asset Retirement Obligations. The adoption did not have an impact on current year net earnings, cash flows or financial position. In the first quarter of 2003, we adopted SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred instead of recognizing the liability at the date of commitment to an exit plan as was previously allowed. The adoption of SFAS No. 146 did not have a material impact on current year net earnings, cash flows or financial position. 22 Marshall Field's Notes to Financial Statements (continued) In the second quarter of 2003, we adopted SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies accounting for derivative instruments and is effective for contracts entered into or modified after June 30, 2003. The adoption of SFAS No. 149 did not have an impact on current year net earnings, cash flows or financial position. In the third quarter of 2003, we adopted SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 clarifies the classification and measurement of certain financial instruments with characteristics of both liabilities and equity and is effective for financial instruments entered into or modified after May 31, 2003 or otherwise for the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have an impact on current year net earnings, cash flows or financial position. Subsequent Events Subsequent to January 31, 2004, Target Corporation reached an agreement to sell substantially all of the operating assets of Marshall Field's for approximately $3.2 billion in cash. The sale, which is subject to regulatory approval, is expected to be finalized during fiscal year 2004. 23 EX-99.4 6 exhibit994q1.txt UNAUDITED PRO FORMA FINANCIAL INFORMATION FOR THE THIRTEEN WEEKS ENDED MAY 1, 2004 AND THE YEAR ENDED JANUARY 31, 2004 Exhibit 99.4 UNAUDITED PRO FORMA FINANCIAL INFORMATION The following unaudited pro forma financial information is based upon the historical financial statements of The May Department Stores Company and Marshall Field's and was prepared to illustrate the effects of our acquisition of Marshall Field's and the financing related to the transaction. We prepared the unaudited pro forma financial information to reflect the acquisition as if it had occurred February 2, 2003 for the pro forma consolidated statements of earnings for the thirteen weeks ended May 1, 2004 and the year ended January 31, 2004. Certain information normally included in financial statements prepared in accordance with generally accepted accounting principles has been omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The unaudited pro forma financial information is presented for informational purposes only, is not necessarily indicative of actual results of operations had the acquisition been effective February 2, 2003, does not reflect potential synergies, integration costs and other such costs or savings, and is not indicative of future results. The May Department Stores Company Unaudited Pro Forma Consolidated Statement of Earnings Thirteen Weeks Ended May 1, 2004 (millions, except per share) Marshall Pro Forma Pro Forma May Field's Adjustments Consolidated Net sales $ 2,963 $ 614 $ (30) (a) $ 3,547 Cost of sales: Recurring 2,120 334 73 (b)(c) 2,527 Restructuring markdowns 5 - - 5 Selling, general, and administrative expenses 639 259 (103) (a)(b)(c)(d) 795 Restructuring costs 2 - - 2 Interest expense, net 76 12 21 (d)(e) 109 Earnings before income taxes 121 9 (21) 109 Provision for income taxes 45 3 (8) (f) 40 Net earnings $ 76 $ 6 $ (13) $ 69 Basic earnings per share $ .25 $ .23 Diluted earnings per share $ .24 $ .22 Weighted average shares outstanding: Basic 291.4 291.4 Diluted 308.3 308.3
The May Department Stores Company Unaudited Pro Forma Consolidated Statement of Earnings Fiscal Year Ended January 31, 2004 (millions, except per share) Marshall Pro Forma Pro Forma May Field's Adjustments Consolidated Net sales $ 13,343 $ 2,584 $ (125) (a) $ 15,802 Cost of sales: Recurring 9,372 1,429 281 (b)(c) 11,082 Restructuring markdowns 6 - - 6 Selling, general, and administrative expenses 2,686 1,026 (409) (a)(b)(c)(d) 3,303 Restructuring costs 322 - - 322 Interest expense, net 318 47 86 (d)(e) 451 Earnings before income taxes 639 82 (83) 638 Provision for income taxes 205 31 (31) (f) 205 Net earnings $ 434 $ 51 $ (52) $ 433 Basic earnings per share $ 1.44 $ 1.44 Diluted earnings per share $ 1.41 $ 1.41 Weighted average shares outstanding: Basic 289.9 289.9 Diluted 307.0 307.0
Notes to the Unaudited Pro Forma Financial Information (a) Represents reclassification of finance charge revenues and late fees from Marshall Field's proprietary credit card program from net sales to a component of selling, general, and administrative expenses to align with the reporting of similar transactions by May. Finance charge revenues and late fees of $30 million and $125 million were reclassified for the thirteen weeks ended May 1, 2004 and year ended January 31, 2004, respectively. In addition, finance charge revenues have been adjusted to remove amounts earned from charges at the seller's other retail divisions that will no longer be earned by Marshall Field's. Accordingly, finance charge revenues included in selling, general, and administrative expenses were reduced by $2 million and $6 million for the thirteen weeks ended May 1, 2004 and year ended January 31, 2004, respectively. (b) Represents reclassification of buying and occupancy expenses from selling, general, and administrative expenses to cost of sales to align the reporting of these expenses with May's accounting policies. Buying and occupancy costs of $73 million and $281 million were reclassified to cost of sales from selling, general, and administrative expenses for the thirteen weeks ended May 1, 2004 and year ended January 31, 2004, respectively. (c) Represents an adjustment of Marshall Field's depreciation and amortization expense to reflect the amounts on the accounting base recognized in recording the acquisition. A reduction in depreciation and amortization of $7 million and $29 million has been made for the thirteen weeks ended May 1, 2004 and year ended January 31, 2004, respectively. (d) Represents a reclassification of interest received on intercompany balances from selling, general, and administrative expenses to interest expense, net. Interest received of $5 million and $20 million was reclassified for the thirteen weeks ended May 1, 2004 and year ended January 31, 2004, respectively. (e) Represents an adjustment to increase interest expense for borrowings used to finance the current acquisition of Marshall Field's. This is partially offset by an adjustment to reduce interest expense for interest incurred by Marshall Field's related to debt retained by the seller, net of the interest received on intercompany balances from the seller. Additional interest expense of $26 million and $106 million for the thirteen weeks ended May 1, 2004 and year ended January 31, 2004, respectively was recorded. (f) Represents adjustments to income tax expense to reflect the impact of the various adjustments to the statements of earnings discussed above. Net adjustments of $8 million and $31 million for the thirteen weeks ended May 1, 2004 and year ended January 31, 2004, respectively, were recorded. -----END PRIVACY-ENHANCED MESSAGE-----