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 August 3, 1996. FEDERATED DEPARTMENT STORES, INC. 151 West 34th Street New York, New York 10001 (212) 695-4400 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. 207,811,452 shares of the Registrant's Common Stock, $.01 par value, were outstanding as of August 31, 1996. PART I -- FINANCIAL INFORMATION FEDERATED DEPARTMENT STORES, INC. Consolidated Statements of Operations (Unaudited) (thousands, except per share figures)
13 Weeks Ended 26 Weeks Ended August 3, July 29, August 3, July 29, 1996 1995 1996 1995 Net Sales, including leased department sales $3,284,228 $3,047,249 $6,584,893 $6,035,255 Cost of sales 1,995,573 1,862,915 4,010,221 3,686,836 Selling, general and administrative expenses 1,113,984 1,067,887 2,267,049 2,137,846 Business integration and consolidation expenses 98,917 89,023 176,605 172,345 Charitable contribution to Federated Department Stores Foundation - 25,581 - 25,581 Operating Income 75,754 1,843 131,018 12,647 Interest expense (126,996) (114,057) (250,341) (223,558) Interest income 11,382 10,841 22,446 22,790 Loss Before Income Taxes (39,860) (101,373) (96,877) (188,121) Federal, state and local income tax benefit 12,667 34,447 31,738 64,196 Net Loss $ (27,193) $ (66,926) $ (65,139) $ (123,925) Loss per Share $ (.13) $ (.37) $ (.31) $ (.68) Average Number of Shares Outstanding 207,663 182,830 207,187 182,754
The accompanying notes are an integral part of these unaudited Consolidated Financial Statements. FEDERATED DEPARTMENT STORES, INC. Consolidated Balance Sheets (Unaudited) (thousands)
August 3, February 3, July 29, 1996 1996 1995 ASSETS: Current Assets: Cash $ 134,133 $ 172,518 $ 238,173 Accounts receivable 2,768,417 2,842,077 2,157,512 Merchandise inventories 3,234,271 3,094,848 2,694,564 Supplies and prepaid expenses 176,729 176,411 107,509 Deferred income tax assets 115,541 74,511 198,123 Total Current Assets 6,429,091 6,360,365 5,395,881 Property and Equipment - net 6,270,870 6,305,167 5,261,698 Intangible Assets - net 731,047 744,689 1,027,033 Notes Receivable 204,035 415,066 407,276 Other Assets 397,326 469,763 365,436 Total Assets $ 14,032,369 $ 14,295,050 $ 12,457,324 LIABILITIES AND SHAREHOLDERS' EQUITY: Current Liabilities: Short-term debt $ 375,363 $ 733,115 $ 259,988 Accounts payable and accrued liabilities 2,386,569 2,358,543 2,139,335 Income taxes 3,211 6,411 35,729 Total Current Liabilities 2,765,143 3,098,069 2,435,052 Long-Term Debt 5,644,524 5,632,232 5,121,445 Deferred Income Taxes 730,725 732,936 873,285 Other Liabilities 561,847 558,127 503,223 Shareholders' Equity 4,330,130 4,273,686 3,524,319 Total Liabilities and Shareholders' Equity $ 14,032,369 $ 14,295,050 $ 12,457,324
The accompanying notes are an integral part of these unaudited Consolidated Financial Statements. FEDERATED DEPARTMENT STORES, INC. Consolidated Statements of Cash Flows (Unaudited) (thousands)
26 Weeks Ended 26 Weeks Ended August 3, 1996 July 29, 1995 Cash flows from operating activities: Net loss $ (65,139) $ (123,925) Adjustments to reconcile net loss to net cash provided (used) by operating activities: Depreciation and amortization of property and equipment 251,657 206,556 Amortization of intangible assets 13,642 21,656 Amortization of financing costs 14,159 9,955 Amortization of original issue discount 225 981 Amortization of unearned restricted stock 1,334 2,569 Changes in assets and liabilities: Decrease in accounts receivable 273,457 108,139 Increase in merchandise inventories (139,423) (313,943) Increase in supplies and prepaid expenses (318) (7,950) Decrease in other assets not separately identified 22,517 29,982 Increase (decrease) in accounts payable and accrued liabilities not separately identified 49,213 (9,700) Decrease in current income taxes (3,200) (29,590) Decrease in deferred income taxes (43,241) (69,064) Increase (decrease) in other liabilities not separately identified 3,420 (1,612) Net cash provided (used) by operating activities 378,303 (175,946) Cash flows from investing activities: Purchase of property and equipment (264,402) (169,932) Disposition of property and equipment 105,053 23,841 Net cash used by investing activities (159,349) (146,091) Cash flows from financing activities: Debt issued 688,665 597,106 Financing costs (11,016) (3,859) Debt repaid (1,034,350) (208,916) Decrease in outstanding checks (21,187) (36,676) Acquisition of treasury stock (598) (375) Issuance of common stock 121,147 6,440 Net cash (used) provided by financing activities (257,339) 353,720
(Continued) FEDERATED DEPARTMENT STORES, INC. Consolidated Statements of Cash Flows (Unaudited) (thousands)
26 Weeks Ended 26 Weeks Ended August 3, 1996 July 29, 1995 Net (decrease) increase in cash $ (38,385) $ 31,683 Cash at beginning of period 172,518 206,490 Cash at end of period $ 134,133 $ 238,173 Supplemental cash flow information: Interest paid $ 219,793 $ 168,239 Interest received 13,611 23,046 Income taxes paid (net of refunds received) 9,368 28,861
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 February 3, 1996 (the "1995 10-K"). The accompanying Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto in the 1995 10-K. Because of the seasonal nature of the general merchandising business, the results of operations for the 13 and 26 weeks ended August 3, 1996 and July 29, 1995 (which do not include the Christmas season) are not indicative of such results for the fiscal year. The Consolidated Financial Statements for the 13 and 26 weeks ended August 3, 1996 and July 29, 1995, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) considered necessary to present fairly, in all material respects, the consolidated financial position and results of operations of the Company and its subsidiaries. 2. Acquisition of Companies The Company acquired Broadway Stores, Inc. ("Broadway") pursuant to an Agreement and Plan of Merger dated August 14, 1995. The total purchase price of the Broadway acquisition was approximately $1,620.0 million, consisting of (i) 12.6 million shares of common stock and options to purchase an additional 1.5 million shares of common stock valued at $352.9 million and (ii) $1,267.1 million of Broadway debt. In addition, a wholly owned subsidiary of the Company purchased $422.3 million of mortgage indebtedness of Broadway for 6.8 million shares of common stock of the Company and a $242.3 million promissory note. The Broadway acquisition was accounted for under the purchase method and, accordingly, the results of operations of Broadway have been included in the Company's results of operations since July 29, 1995 and the purchase price has been allocated to Broadway's assets and liabilities based on their estimated fair values as of that date. The following unaudited pro forma condensed statements of operations gives effect to the Broadway acquisition and related financing transactions as if such transactions had occurred at the beginning of the period presented. 13 Weeks Ended 26 Weeks Ended July 29, 1995 July 29, 1995 (millions, except per share figures) Net sales $3,507.9 $6,919.8 Net loss (90.3) (174.2) Loss per share (.45) (.86) FEDERATED DEPARTMENT STORES, INC. Notes to Consolidated Financial Statements (Unaudited) The foregoing unaudited pro forma condensed statements of operations give effect to, among other pro forma adjustments, the following: (i) Interest expense on debt incurred in connection with the acquisition and the reversal of certain of Broadway's historical interest expense; (ii) Amortization, over 20 years, of the excess of cost over net assets acquired; (iii) Depreciation and amortization adjustments related to fair market value of assets acquired; (iv) Adjustments to income tax expense related to the above; and (v) Adjustments for shares issued. The foregoing unaudited pro forma information is provided for illustrative purposes only and does not purport to be indicative of results that actually would have been achieved had the Broadway acquisition been consummated on the first day of the periods presented or of future results. 3. Business Integration and Consolidation Expenses During the 26 weeks ended August 3, 1996, the Company recorded $176.6 million of business integration and consolidation expenses associated with the integration of Broadway into the Company ($148.7 million) and the ongoing consolidation of Macy's and other support operation restructurings ($27.9 million). Included in the Broadway integration expenses were $65.7 million of inventory valuation adjustments to merchandise in lines of business which the Company, subsequent to acquisition, eliminated or replaced. The remainder of the Broadway integration expenses relate primarily to the costs associated with converting the Broadway stores to other name plates (including advertising, credit card issuance and promotion, and other name change expenses) and the costs of operating Broadway central office functions for a transitional period. During the 26 weeks ended July 29, 1995, the Company recorded $172.3 million of business integration and consolidation expenses associated with the integration of Macy's into the Company ($145.2 million) and the consolidation of the Company's Rich's/Goldsmith's and Lazarus divisions ($27.1 million). The primary components of the Macy's integration expenses were $67.8 million of inventory valuation adjustments to merchandise in lines of business which the Company, subsequent to the acquisition, eliminated or replaced, $21.6 million of costs to close and sell certain stores and to convert a number of stores to other nameplates, $19.7 million of severance costs and $36.1 million of other costs and expenses associated with integrating Macy's into the Company. Of the $27.1 million of expenses associated with the divisional consolidation referred to above, $20.4 million relates to inventory valuation adjustments to merchandise of the affected divisions in lines of business which were eliminated or replaced as a result of the consolidation. FEDERATED DEPARTMENT STORES, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Comparison of the 13 Weeks Ended August 3, 1996 and July 29, 1995 For purposes of the following discussion, all references to "second quarter of 1996" and "second quarter of 1995" are to the Company's 13-week fiscal periods ended August 3, 1996 and July 29, 1995, respectively. Net sales for the second quarter of 1996 totaled $3,284.2 million, compared to net sales of $3,047.3 million for the second quarter of 1995, an increase of 7.8%. Net sales for the second quarter of 1996 include the stores added in the Broadway acquisition. On a comparable store basis, net sales for the second quarter of 1996 increased 0.8% over the second quarter of 1995. Net sales for the second quarter of 1996 were somewhat negatively impacted by the Company's efforts to gradually reduce the degree to which it utilizes promotional selling practices with respect to home-related merchandise. Cost of sales was 60.8% as a percent of net sales for the second quarter of 1996 compared to 61.1% for the second quarter of 1995. The improvement reflects the lower level of promotional activity for home-related merchandise and increased sales of higher margin private label merchandise. Cost of sales was not impacted by the valuation of merchandise inventory on the last-in, first-out basis in the second quarter of 1996 or the second quarter of 1995. Selling, general and administrative expenses were 33.9% as a percent of net sales for the second quarter of 1996 compared to 35.1% for the second quarter of 1995. The improvement primarily reflects the operating efficiencies resulting from the integration of Macy's into the Company in fiscal 1995 and other support operation restructurings. Business integration and consolidation expenses for the second quarter of 1996 consist of $82.7 million associated with the integration of Broadway and $16.2 million related to the ongoing consolidation of Macy's and other support operation restructurings. During the remainder of fiscal 1996, the Company expects to incur approximately $120.0 million of additional business integration and consolidation expenses in connection with the consolidation of Broadway, the ongoing consolidation of Macy's and the support operation restructurings. Business integration and consolidation expenses for the second quarter of 1995 consist of $71.7 million associated with the integration of Macy's into the Company and $17.3 million related to the consolidation of the Company's Rich's/Goldsmith's and Lazarus divisions. Net interest expense was $115.6 million for the second quarter of 1996, compared to $103.2 million for the second quarter of 1995. The higher interest expense for the second quarter of 1996 is principally due to the higher levels of borrowings incurred in connection with the acquisition of Broadway. The Company's effective income tax rate of 31.8% for the second quarter of 1996 differs from the federal income tax statutory rate of 35% principally because of permanent differences arising from the amortization of intangible assets and state and local income taxes. FEDERATED DEPARTMENT STORES, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Comparison of the 26 Weeks Ended August 3, 1996 and July 29, 1995 For purposes of the following discussion, all references to "1996" and "1995" are to the Company's 26 week fiscal periods ended August 3, 1996 and July 29, 1995, respectively. Net sales for 1996 were $6,584.9 million compared to $6,035.3 million for 1995, an increase of 9.1%. On a comparable store basis, net sales for 1996 increased 2.7%, over 1995. Net sales for 1996 were somewhat negatively impacted by the Company's efforts to gradually reduce the degree to which it utilizes promotional selling practices with respect to home- related merchandise. Cost of sales was 60.9% as a percent of net sales for 1996 compared to 61.1% for 1995. The improvement reflects the lower level of promotional activity for home-related merchandise and increased sales of higher margin private label merchandise. Cost of sales includes no charge in 1996 compared to a charge of $1.8 million in 1995 resulting from the valuation of merchandise inventory on the last-in, first- out basis. Selling, general and administrative expenses were 34.4% as a percent of net sales for 1996 compared to 35.4% for 1995. The improvement primarily reflects the operating efficiencies resulting from the integration of Macy's into the Company in fiscal 1995 and other support operation restructurings. Business integration and consolidation expenses for 1996 consist of $148.7 million associated with the integration of Broadway and $27.9 million related to the ongoing consolidation of Macy's and other support operation restructurings. Business integration and consolidation expenses for 1995 consist of $145.2 million associated with the integration of Macy's into the Company and $27.1 million related to the consolidation of the Company's Rich's/Goldsmith's and Lazarus divisions. Net interest expense was $227.9 million for 1996 compared to $200.8 million for 1995. The higher interest expense for 1996 is principally due to higher levels of borrowing incurred in connection with the acquisition of Broadway. The Company's effective income tax rate of 32.8% for 1996 differs from the federal income tax statutory rate of 35.0% principally because of permanent differences arising from the amortization of intangible assets and state and local income taxes. Liquidity and Capital Resources For purposes of the following discussion, all references to "1996" and "1995" are to the Company's 26 week fiscal periods ended August 3, 1996 and July 29, 1995, respectively. The Company's principal sources of liquidity are cash from operations, cash on hand and available credit facilities. FEDERATED DEPARTMENT STORES, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Net cash provided by operating activities in 1996 was $378.3 million an increase of $554.2 million compared to net cash used by operating activities of $175.9 million in 1995. In addition to improved operating results, the most significant factors contributing to this improvement were greater reductions in customer accounts receivable due to Broadway store closings and lower increases in merchandise inventories. Net cash used in investing activities was $159.3 million in 1996 with purchases of property and equipment totaling $264.4 million and dispositions of property and equipment, principally Broadway stores, totaling $105.1 million. During 1996, the Company opened two new furniture galleries, converted an existing Stern's store to a Macy's store and closed the existing Macy's store in that trading area and closed three other stores. Net cash used by the Company for all financing activities was $257.3 million in 1996. During 1996, the Company repaid $1,034.4 million of debt, including $386.5 million of commercial paper borrowings under a receivables based credit facility of a subsidiary of Broadway which was terminated on May 14, 1996, $64.0 million of asset-backed notes issued by a subsidiary of Broadway and $214.2 million of term borrowings and $230.0 million of revolving credit loans under its bank credit facility. During 1996, the Company issued $450.0 million of 8-1/2% Senior Notes due 2003 and a wholly owned subsidiary of the Company issued $238.8 million of asset-backed certificates in two separate classes. The two classes are: (i) $218.0 million in aggregate principal amount of 6.70% Class A Asset- Backed Certificates, Series 1996-1 due May 15, 2001 and (ii) $20.8 million in aggregate principal amount of 6.85% Class B Asset-Backed Certificates, Series 1996-1 due June 15, 2001. The Company also issued 4.1 million shares of common stock and received $99.0 million in proceeds upon the exercise of its Series A Warrants. On May 3, 1997, a $200.0 million installment of a note receivable matures and $176.0 million of borrowings under a note monetization facility become due and payable. Accordingly, as of August 3, 1996, such amounts have been included in accounts receivable and short-term debt, respectively. Management believes the department store industry will continue to consolidate. Accordingly, the Company intends from time to time to consider additional acquisitions of department store assets and companies. Management of the Company believes that, with respect to its current operations, cash on hand and funds from operations, together with its credit facilities, will be sufficient to cover its reasonably foreseeable working capital, capital expenditure and debt service requirements. Acquisition transactions, if any, are expected to be financed through a combination of cash on hand and from operations and the possible issuance from time to time of long-term debt or other securities. Depending upon conditions in the capital markets and other factors, the Company will from time to time consider other possible capital markets transactions, including the refinancing of indebtedness. PART II -- OTHER INFORMATION FEDERATED DEPARTMENT STORES, INC. Item 1. Legal Proceedings The information regarding legal proceedings in the Company's Quarterly Report on Form 10-Q for the period ended May 4, 1996 covers events known to the Company and occurring prior to June 4, 1996. Subsequent to that date, the Company and its subsidiaries have been involved in various legal proceedings incidental to the normal course of their business. Management does not expect that any of such proceedings will have a material adverse effect on the Company's consolidated financial position or results of operations. Item 5. Other Information On June 4, 1996, the Company and GE Capital Consumer Card Co. ("GE Bank") and certain of their respective affiliates entered into various agreements pursuant to which the contractual arrangements previously entered into between Macy's and GE Bank were modified to provide for, among other things, a methodology that will govern the allocation of the ownership of Macy's credit card accounts between GE Bank and the Company. In addition, the parties entered into certain cross- servicing arrangements with a view to facilitating uniform treatment of Company-owned Macy's accounts and GE Bank-owned Macy's accounts. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10.1 Amended and Restated Credit Card Program Agreement, dated as of June 4, 1996, by and among GE Capital Consumer Card Co. ("GE Bank"), the Company, FDS National Bank ("FDS Bank"), Macy's East, Inc., Macy's West, Inc., Bullock's, Inc., Broadway Stores, Inc., FACS Group, Inc. ("FACS") and MSS-Delaware, Inc. * 10.2 Amended and Restated Trade Name and Service Mark License Agreement, dated as of June 4, 1996, by and among the Company, GE Bank and General Electric Capital Corporation ("GE Capital") 10.3 FACS Credit Services and License Agreement, dated as of June 4, 1996, by and among GE Bank, GE Capital and FACS * 10.4 FDS Guaranty, dated as of June 4, 1996 10.5 GE Capital Credit Services and License Agreement, dated as of June 4, 1996, by and among GE Capital, FDS Bank, the Company and FACS * PART II -- OTHER INFORMATION FEDERATED DEPARTMENT STORES, INC. 10.6 GE Capital/GE Bank Credit Services Agreement, dated as of June 4, 1996, by and among GE Capital and GE Bank * 10.7 Amended and Restated Commercial Accounts Agreement, dated as of June 4, 1996, by and among GE Capital, the Company, FDS Bank, Macy's East, Inc., Macy's West, Inc., Bullock's, Inc., Broadway Stores, Inc., FACS and MSS-Delaware, Inc. * 11 Statement re computation of per share earnings 27 Financial Data Schedule (b) Reports on Form 8-K No reports were filed on Form 8-K during the quarter ended August 3, 1996. * Confidential portions of this Exhibit were omitted and filed separately with the SEC pursuant to Rule 24b-2 under the Exchange Act. 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 September 17, 1996 /s/ Dennis J. Broderick Dennis J. Broderick Senior Vice President, General Counsel and Secretary /s/ John E. Brown John E. Brown Senior Vice President and Controller (Principal Accounting Officer)