10-Q 1 0001.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal quarter ended April 29, 2000. FEDERATED DEPARTMENT STORES, INC. 151 West 34th Street New York, New York 10001 (212) 494-1602 and 7 West Seventh St. Cincinnati, Ohio 45202 (513) 579-7000 Delaware 1-13536 13-3324058 (State of (Commission File No.) (I.R.S. Employer Incorporation) Identification Number) The Registrant has filed all reports required to be filed by Section 12, 13 or 15 (d) of the Act during the preceding 12 months and has been subject to such filing requirements for the past 90 days. 207,936,386 shares of the Registrant's Common Stock, $.01 par value, were outstanding as of May 27, 2000. PART I -- FINANCIAL INFORMATION FEDERATED DEPARTMENT STORES, INC. Consolidated Statements of Income (Unaudited) (millions, except per share figures) 13 Weeks Ended 13 Weeks Ended April 29, 2000 May 1, 1999 Net Sales $ 4,032 $ 3,600 Cost of sales 2,395 2,174 Selling, general and administrative expenses 1,384 1,201 Operating Income 253 225 Interest expense (100) (78) Interest income 1 3 Income Before Income Taxes 154 150 Federal, state and local income tax expense (65) (63) Net Income $ 89 $ 87 Basic earnings per share $ .42 $ .42 Diluted earnings per share $ .41 $ .40 The accompanying notes are an integral part of these unaudited Consolidated Financial Statements. FEDERATED DEPARTMENT STORES, INC. Consolidated Balance Sheets (Unaudited) (millions) April 29, January 29, May 1, 2000 2000 1999 ASSETS: Current Assets: Cash $ 249 $ 218 $ 239 Accounts receivable 4,031 4,313 2,165 Merchandise inventories 3,869 3,589 3,599 Supplies and prepaid expenses 217 230 200 Deferred income tax assets 176 172 142 Total Current Assets 8,542 8,522 6,345 Property and Equipment - net 6,741 6,828 6,624 Intangible Assets - net 1,720 1,735 1,889 Other Assets 652 607 572 Total Assets $ 17,655 $ 17,692 $ 15,430 LIABILITIES AND SHAREHOLDERS' EQUITY: Current Liabilities: Short-term debt $ 1,352 $ 1,284 $ 1,225 Accounts payable and accrued liabilities 3,006 3,043 2,699 Income taxes 83 225 75 Total Current Liabilities 4,441 4,552 3,999 Long-Term Debt 4,757 4,589 3,806 Deferred Income Taxes 1,448 1,444 1,236 Other Liabilities 548 555 576 Shareholders' Equity 6,461 6,552 5,813 Total Liabilities and Shareholders' Equity $ 17,655 $ 17,692 $ 15,430 The accompanying notes are an integral part of these unaudited Consolidated Financial Statements. FEDERATED DEPARTMENT STORES, INC. Consolidated Statements of Cash Flows (Unaudited) (millions) 13 Weeks Ended 13 Weeks Ended April 29, 2000 May 1, 1999 Cash flows from operating activities: Net income $ 89 $ 87 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 161 158 Amortization of intangible assets 21 15 Amortization of financing costs 2 1 Amortization of unearned restricted stock 3 - Changes in assets and liabilities: Decrease in accounts receivable 284 158 Increase in merchandise inventories (277) (175) Decrease in supplies and prepaid expenses 13 2 (Increase) decrease in other assets not separately identified (13) 43 Decrease in accounts payable and accrued liabilities not separately identified (78) (114) Decrease in current income taxes (142) (23) Increase in deferred income taxes 1 1 Decrease in other liabilities not separately identified (6) (7) Net cash provided by operating activities 58 146 Cash flows from investing activities: Purchase of property and equipment (69) (52) Capitalized software (15) (6) Investments in companies (35) (9) Acquisition of Fingerhut Companies, Inc., net of cash acquired - (1,539) Disposition of property and equipment - 3 Net cash used by investing activities (119) (1,603) Cash flows from financing activities: Debt issued 237 1,326 Financing costs - (10) Debt repaid (1) (1) Increase in outstanding checks 36 69 Acquisition of treasury stock (218) - Issuance of common stock 38 5 Net cash provided by financing activities 92 1,389 (Continued) FEDERATED DEPARTMENT STORES, INC. Consolidated Statements of Cash Flows (Unaudited) (millions) 13 Weeks Ended 13 Weeks Ended April 29, 2000 May 1, 1999 Net increase (decrease) in cash 31 (68) Cash at beginning of period 218 307 Cash at end of period $ 249 $ 239 Supplemental cash flow information: Interest paid $ 108 73 Interest received 1 3 Income taxes paid (net of refunds received) 210 84 Schedule of noncash investing and financing activities: Debt assumed in acquisition - 125 Equity issued in acquisition - 12 The accompanying notes are an integral part of these unaudited Consolidated Financial Statements. FEDERATED DEPARTMENT STORES, INC. Notes to Consolidated Financial Statements (Unaudited) 1. Summary of Significant Accounting Policies A description of the Company's significant accounting policies is included in the Company's Annual Report on Form 10-K for the fiscal year ended January 29, 2000 (the "1999 10-K"). The accompanying Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto in the 1999 10-K. Substantially all department store merchandise inventories are valued by the retail method and stated on the LIFO (last-in, first-out) basis, which is generally lower than market. Direct-to-customer merchandise inventories are stated at the lower of FIFO (first-in, first-out) cost or market. Because of the seasonal nature of the retail business, the results of operations for the 13 weeks ended April 29, 2000 and May 1, 1999 (which do not include the Christmas season) are not indicative of such results for the fiscal year. The Consolidated Financial Statements for the 13 weeks ended April 29, 2000 and May 1, 1999, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) considered necessary to present fairly, in all material respects, the consolidated financial position and results of operations of the Company and its subsidiaries. Certain reclassifications were made to prior period amounts to conform with the classifications of such amounts for the most recent period. 2. Acquisition On March 18, 1999, the Company purchased Fingerhut for a purchase price of approximately $1,720 million, including the assumption of $125 million of debt. The Fingerhut acquisition is being accounted for under the purchase method of accounting. Accordingly, the Company's results of operations do not include Fingerhut's results of operations for any period prior to March 18, 1999 and the purchase price has been allocated to Fingerhut's assets and liabilities based on the estimated fair value of these assets and liabilities as of March 18, 1999. FEDERATED DEPARTMENT STORES, INC. Notes to Consolidated Financial Statements (Unaudited) 3. Segment Data The Company conducts its business through two segments, department stores and direct-to-customer. The department store segment sells a wide range of merchandise, including men's, women's and children's apparel and accessories, cosmetics, home furnishings and other consumer goods. The direct-to-customer segment (Fingerhut, Bloomingdale's By Mail, bloomingdales.com, Macy's By Mail, macys.com and certain other direct marketing activities) sells a broad range of products and services directly to consumers via catalogs, direct marketing and the Internet. "Corporate and other" consists of the income or expense associated with the corporate office and certain items managed on a company-wide basis (e.g., intangibles, financial instruments, investments, retirement benefits and properties held for sale or disposition). The financial information for each segment is reported on the basis used internally by the Company to evaluate performance and allocate resources. 13 Weeks Ended April 29, May 1, 2000 1999 (millions) Net Sales Department Stores $ 3,541 $ 3,437 Direct-to-Customer 491 163 Total $ 4,032 $ 3,600 Operating income Department Stores $ 308 $ 273 Direct-to-Customer (23) (2) Corporate and other (32) (46) Total $ 253 $ 225 Depreciation and amortization expense Department Stores $ 149 $ 153 Direct-to-Customer 12 3 Corporate and other 24 17 Total $ 185 $ 173 FEDERATED DEPARTMENT STORES, INC. Notes to Consolidated Financial Statements (Unaudited) 4. Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share: 13 Weeks Ended April 29, 2000 May 1, 1999 (millions, except per share data) Income Shares Income Shares Net income and average number of shares outstanding $ 89 212.3 $ 87 208.6 Shares to be issued under deferred compensation plans - .5 - .4 $ 89 212.8 $ 87 209.0 Basic earnings per share $ .42 $ .42 Effect of dilutive securities: Warrants - 1.9 - 5.7 Stock options - 1.6 - 1.7 $ 89 216.3 $ 87 216.4 Diluted earnings per share $ .41 $ .40 In addition to the warrants and stock options reflected in the foregoing table, warrants and stock options to purchase 9.6 million and 6.6 million shares of common stock at prices ranging from $38.06 to $79.44 per share were outstanding at April 29, 2000 and May 1, 1999, respectively, but were not included in the computation of diluted earnings per share because the exercise price thereof exceeded the average market price and would have been antidilutive. FEDERATED DEPARTMENT STORES, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations For purposes of the following discussion, all references to "first quarter of 2000" and "first quarter of 1999" are to the Company's 13-week fiscal periods ended April 29, 2000 and May 1, 1999, respectively. Results of Operations Comparison of the 13 Weeks Ended April 29, 2000 and May 1, 1999 Net sales for the first quarter of 2000 totaled $4,032 million, compared to net sales of $3,600 million for the first quarter of 1999, an increase of 12.0%. Net sales for department stores for the first quarter of 2000 were $3,541 million, compared to net sales of $3,437 million for the first quarter of 1999, an increase of 3.0%. On a comparable store basis (sales from stores in operation throughout the first quarter of 1999 and the first quarter of 2000), net sales for department stores for the first quarter of 2000 increased 2.9% compared to the first quarter of 1999. Net sales for the direct-to-customer segment totaled $491 million for the first quarter of 2000 (which includes Fingerhut for the entire period) compared to $163 million for the first quarter of 1999 (which includes Fingerhut from and after the March 18, 1999 acquisition date). Cost of sales was 59.4% of net sales for the first quarter of 2000, compared to 60.4% for the first quarter of 1999. Cost of sales as a percent of net sales for department stores improved 0.4% in the first quarter of 2000 compared to the same period a year ago, benefiting from lower markdowns. This improvement in the cost of sales rate for department stores, together with a relatively lower cost of sales rate for the direct-to-customer segment, contributed to the overall 1.0% improvement in the cost of sales rate for the first quarter of 2000. The valuation of department store merchandise inventories on the last-in, first-out basis did not impact cost of sales in either period. Selling, general and administrative ("SG&A") expenses were 34.3% of net sales for the first quarter of 2000 compared to 33.4% for the first quarter of 1999. Department store SG&A expenses improved 0.4% as a percent of department store net sales, reflecting the impact of lower depreciation expense and higher finance charge income. SG&A expenses for the direct-to- customer segment include increased costs related to recently launched businesses. A relatively higher SG&A expense rate for the direct-to-customer segment, including recently launched businesses, and increased amortization expense resulting from the Fingerhut acquisition combined to offset the improvement in the department store SG&A expense rate and produce a 0.9% increase in the overall SG&A expense rate for the first quarter of 2000. Net interest expense was $99 million for the first quarter of 2000, compared to $75 million for the first quarter of 1999. The higher interest expense for the first quarter of 2000 is due primarily to the increased outstanding debt resulting from the Fingerhut acquisition and the consolidation of the Fingerhut Master Trust for financial reporting purposes. The Company's effective income tax rate of 42.4% for the first quarter of 2000 differs from the federal income tax statutory rate of 35.0% principally because of the effect of state and local income taxes and permanent differences arising from the amortization of intangible assets and from other non- deductible items. FEDERATED DEPARTMENT STORES, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Liquidity and Capital Resources The Company's principal sources of liquidity are cash from operations, cash on hand and certain available credit facilities. Net cash provided by operating activities in the first quarter of 2000 was $58 million, compared to the $146 million provided in the first quarter of 1999. The decrease in net cash provided by operating activities reflects a greater decrease in current income taxes and a greater increase in merchandise inventories partially offset by a greater decrease in accounts receivable and a lesser decrease in accounts payable and accrued liabilities. Net cash used by investing activities was $119 million for the first quarter of 2000. Investing activities for the first quarter of 2000 included purchases of property and equipment totaling $69 million, capitalized software of $15 million and investments in companies engaged in complementary businesses totaling $35 million. The Company plans to open eight new department stores and four new furniture galleries during the remainder of 2000. Net cash provided to the Company by all financing activities was $92 million for the first quarter of 2000. During the first quarter of 2000, the Company issued $237 million of short-term debt to partially fund investing activities and the acquisition of the Company's Common Stock under its stock repurchase program. The Company purchased 5.7 million shares of its Common Stock under the stock repurchase program during the first quarter of 2000 at an approximate cost of $217 million. The Company may from time to time commence, continue or suspend repurchases of shares under the stock repurchase program, depending on prevailing market conditions, alternate uses of capital and other factors. Also during the first quarter of 2000, the Company issued 1.0 million shares of its Common Stock and received $35 million in proceeds from the exercise of the Company's Series B Warrants, which expired on February 15, 2000. On June 6, 2000, the Company issued $350 million of 8.5% Senior Notes due 2010. The proceeds were used to repay certain short-term borrowings and, accordingly, $347 million of short-term borrowings are classified as long-term debt as of April 29, 2000. Management believes the department store business and other retail businesses will continue to consolidate. Accordingly, the Company intends from time to time to consider additional acquisitions of, and investments in, department stores, Internet-related companies, catalog companies and other complementary assets and companies. Management believes that, with respect to its current operations, cash on hand and funds from operations, together with its credit facilities, will be sufficient to cover its reasonably foreseeable working capital, capital expenditure and debt service requirements. Acquisition transactions, if any, are expected to be financed through a combination of cash on hand and from operations and the possible issuance from time to time of long-term debt or other securities. Depending upon conditions in the capital markets and other factors, the Company will from time to time consider the issuance of debt or other securities, or other possible capital markets transactions, the proceeds of which could be used to refinance existing indebtedness or for other corporate purposes. PART II -- OTHER INFORMATION FEDERATED DEPARTMENT STORES, INC. Item 4. Submission of Matters to a Vote of Security Holders The Annual Meeting of the Company's stockholders was held on May 19, 2000. The Company's stockholders voted on the following items at such meeting: i. The stockholders approved the election of three Directors for a three-year term expiring at the 2003 Annual Meeting of the Company's stockholders. The votes for such elections were as follows: Earl G. Graves Sr. - 173,927,840 votes in favor and 37,620,969 votes withheld; Craig E. Weatherup - 173,966,269 votes in favor and 37,582,540 votes withheld; and James M. Zimmerman -173,979,300 votes in favor and 37,569,509 votes withheld. There were no broker non-votes on this item. ii. The stockholders ratified the employment of KPMG LLP as the Company's independent accountants for the fiscal year ending February 3, 2001. The votes for the ratification were 178,294,179, the votes against the ratification were 76,043, the votes abstained were 395,135, and there were no broker non-votes. iii. The stockholders approved a proposal to amend the 1995 Executive Equity Incentive Plan to increase the number of shares of common stock of the Company available for issuance thereunder. The votes for the proposal were 113,964,761, the votes against the proposal were 64,279,491, the votes abstained were 521,105, and there were no broker non-votes. iv. The stockholders approved a proposal to amend the 1992 Incentive Bonus Plan to increase the maximum annual incentive award that may be paid to any participant of the Plan. The votes for the proposal were 164,516,692, the votes against the proposal were 11,850,801, the votes abstained were 2,397,864, and there were no broker non-votes. v. The stockholders approved a stockholder's proposal seeking the adoption of a system for the annual election of directors. The votes for the proposal were 121,569,001, the votes against the proposal were 40,449,963, the votes abstained were 997,697, and there were 15,779,126 broker non-votes. Item 5. Other Information This report and other reports, statements and information previously or subsequently filed by the Company with the Securities and Exchange Commission (the "SEC") contain or may contain forward-looking statements. Such statements are based upon the beliefs and assumptions of, and on information available to, the management of the Company at the time such statements are made. The following are or may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995: (i) statements preceded by, followed by or that include the words "may," "will," "could," "should," "believe," "expect," "future," "potential," "anticipate," "intend," "plan," "estimate," or "continue" or the negative or other variations thereof and (ii) statements regarding matters that are not historical facts. Such forward-looking statements are subject to various risks and uncertainties, including (i) risks and uncertainties relating to the possible invalidity of the underlying beliefs and assumptions, (ii) possible changes or developments in social, economic, business, industry, market, legal and regulatory circumstances and conditions, and (iii) actions taken or omitted to be taken by third parties, including customers, suppliers, business partners, competitors and legislative, regulatory, judicial and other governmental authorities and officials. In addition to any risks and uncertainties specifically identified in the text surrounding such forward-looking statements, the statements in the immediately preceding sentence and the statements under captions such as "Risk Factors" and "Special Considerations" in reports, statements and information filed by the Company with the SEC from time to time constitute cautionary statements identifying important factors that could cause actual amounts, results, events and circumstances to differ materially from those reflected in such forward-looking statements. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10.1 Employment Agreement, dated as of April 1, 2000, between Terry J. Lundgren and the Company.* 10.2 1992 Incentive Bonus Plan as amended and restated as of May 19, 2000 (incorporated by reference to Appendix B of the Company's Proxy Statement filed April 19, 2000).* 10.3 1995 Executive Equity Incentive Plan as amended and restated as of May 19, 2000 (incorporated by reference to Appendix A of the Company's Proxy Statement filed April 19, 2000).* 27.1 Financial Data Schedule 27.2 Restated Financial Data Schedule 27.3 Restated Financial Data Schedule _________________ * Constitutes a compensatory plan or arrangement. (b) Reports on Form 8-K No reports were filed on Form 8-K during the quarter ended April 29, 2000. FEDERATED DEPARTMENT STORES, INC. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunder duly authorized. FEDERATED DEPARTMENT STORES, INC. Date June 13, 2000 /s/ Dennis J. Broderick Dennis J. Broderick Senior Vice President, General Counsel and Secretary /s/ Joel A. Belsky Joel A. Belsky Vice President and Controller (Principal Accounting Officer)