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1 9 9 8 A n n u a l R e p o r t
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As of January 31, 1998, all of the Marshalls and T.J. Maxx properties reserved for had been closed. The reserve also includes some activity relating to several HomeGoods store closings, the impact of which is immaterial. Actual spending and charges against the reserve are summarized below:
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| January 30, | January 31, | January 25, | |
| In Thousands | 1999 | 1998 | 1997 |
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| Cash charges: | |||
| Lease related obligations | $12,521 | $13,593 | $21,277 |
| Inventory markdowns | - | - | 15,886 |
| Severance and other costs | 1,008 | 3,763 | 13,572 |
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| Subtotal cash charges | 13,529 | 17,356 | 50,735 |
| Non-cash charges: | |||
| Property write-offs | - | 5,402 | 11,064 |
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| Total reserve spending | $13,529 | $22,758 | $61,799 |
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The balance in the store closing and restructuring reserve as of January 31, 1999 of $44.6 million is virtually all for the estimated cost of future lease obligations of the closed stores and other facilities. It includes estimates and assumptions as to how the leases will be disposed of, which could change, however, the Company believes it has adequate reserves for these obligations. The spending of the reserve will reduce operating cash flows in varying amounts over the next ten to fifteen years as the leases expire or are settled. Future spending against the store closing and restructuring reserve will not have a material impact on future cash flows or the Company’s financial condition.
The Company also has a reserve for future obligations relating to its discontinued operations. During fiscal 1999 the reserve increased by $11.9 million. The Company added $15 million to the reserve for additional lease related obligations. This was offset by charges against the reserve in fiscal 1999 of $3.1 million, primarily for charges for lease related costs associated with the former Zayre stores. The decrease in the reserve in fiscal 1998 of $5.8 million was primarily for settlement costs associated with Chadwick’s as well as lease related costs associated with the former Zayre and Hit or Miss locations. The balance in the discontinued operations reserve of $29.7 million as of January 30, 1999 is for lease related obligations of the former Zayre and Hit or Miss stores, which are expected to reduce operating cash flows in varying amounts over the next ten to fifteen years, as leases expire, are settled or are terminated. Future spending against the discontinued operations reserve will not have a material impact on future cash flows or the Company’s financial condition. The Company is also contingently liable on certain leases of its discontinued operation, see Note K to the consolidated financial statements for further information.
I n v e s t i n g A c t i v i t i e s : The Company’s cash flows for investing activities include capital expenditures for the last two years as set forth in the table below:
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| January 30, | January 31, | |
| In Millions | 1999 | 1998 |
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| New stores | $ 66.7 |
$53.1 |
| Store renovations and improvements | 92.1 | 103.3 |
| Office and distribution centers | 48.9 | 36.0 |
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| Capital expenditures | $207.7 | $192.4 |
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The Company expects that capital expenditures will approximate $245 million for fiscal year 2000. This includes $83.5 million for new stores, $97.7 million for store renovations and improvements and $63.8 million for the Company’s office and distribution centers.
Investing activities for fiscal 1999 and fiscal 1998 include proceeds of $9.4 million and $15.7 million, respectively, for the sale of shares of Brylane Inc. common stock. Fiscal 1998 also includes a payment by the Company, to Brylane, of $33.2 million as a final settlement of the proceeds from the sale of Chadwick’s. As part of the sale of Chadwick’s, the Company retained the consumer credit card receivables of the division as of the closing date, which totaled approximately $125 million, with $54.5 million still outstanding as of January 25, 1997. The balance of the receivables was collected in the first quarter of fiscal 1998 and is classified as cash provided by discontinued operations. The Company also received a $20 million convertible note which, as of January 30, 1999, is no longer outstanding.
F i n a n c i n g A c t i v i t i e s : The strong cash flows from operations has exceeded the Company’s needs in fiscal 1999 and fiscal 1998, and no additional borrowings were required. Financing activities for fiscal 1999 include principal payments on long-term debt of $23.4 million. Financing activities for fiscal 1998 include principal payments on long-term debt of $27.2 million, including $8.5 million to fully retire the Company’s 9 1/2% sinking fund debentures. As a result of its strong cash position, the Company prepaid certain long-term debt in addition to regularly scheduled maturities during fiscal 1997. On September 16, 1996, pursuant to a call for redemption, the Company prepaid $88.8 million of its 9 1/2% sinking fund debentures. In addition, during the fourth quarter of fiscal 1997, the Company retired the entire outstanding balance of the $375 million term loan incurred to acquire Marshalls. The Company recorded after-tax extraordinary charges totaling $5.6 million, or $.02 per share, due to the early retirement of these obligations. During fiscal 1997, the Company paid a total of $455.6 million for the prepayment of certain long-term debt and a total of $46.5 million for regularly scheduled maturities of long-term debt.
In June 1997, the Company announced a $250 million stock buyback program. During fiscal 1998, the Company repurchased 17.1 million shares of common stock (adjusted for stock splits) for a cost of $245.2 million. The program was completed in February 1998 at which time the Company announced a second $250 million stock repurchase program. In October 1998, the Company completed the second $250 million stock repurchase program and announced its intentions to repurchase an additional $750 million of common stock over the next several years. The Company has spent $95.5 million through January 30, 1999 on this current repurchase program. In total, during fiscal 1999, the Company repurchased a combined total of 15.6 million shares of common stock (adjusted for stock splits) at a total cost of $350.3 million.
The Company declared quarterly dividends on its common stock of $.03 per share in fiscal 1999 and $.025 per share in fiscal 1998. Annual dividends on common stock totaled $38.1 million in fiscal 1999 and $31.8 million in fiscal 1998. The Company also had dividend requirements on all of its outstanding preferred stock which totaled $3.5 million in fiscal 1999, $11.7 million in fiscal 1998 and $13.7 million in fiscal 1997. During fiscal 1998, 770,200 shares of the Series E preferred stock were voluntarily converted into 8.3 million shares of common stock and 2,500 shares were repurchased. During fiscal 1999, 357,300 shares of Series E preferred stock were voluntarily converted into 6.7 million shares of common stock. On November 18, 1998 the remaining 370,000 outstanding shares of the Series E preferred stock were mandatorily converted into 8.0 million shares of common stock in accordance with its terms. Inducement fees of $130,000 and $3.8 million were paid on the Series E voluntary conversions in fiscal 1999 and fiscal 1998, respectively. The inducement fees are classified as preferred dividends. During fiscal 1997, both the Series A cumulative convertible preferred stock and the Series C cumulative convertible preferred stock were converted into an aggregate of 4.4 million shares of common stock pursuant to separate calls for redemption. Preferred dividends were paid through the respective conversion dates. The Series D preferred stock automatically converted on November 17, 1996 into 1.3 million shares of common stock. Financing activities for fiscal 1999 and 1998 also include proceeds of $27.8 million and $15.5 million, respectively, from the exercise of employee stock options. These proceeds include $13.8 million and $6.1 million for related tax benefits in fiscal 1999 and fiscal 1998, respectively.
The Company has traditionally funded its seasonal merchandise requirements through short-term bank borrowings and the issuance of short-term commercial paper. The Company has the ability to borrow up to $500 million under a revolving credit facility it entered into in September 1997. This agreement replaced the agreement entered into at the time of the Marshalls acquisition and contains certain financial covenants which include a minimum net worth requirement and certain leverage and fixed charge coverage ratios. In fiscal 1998 the Company recorded an extraordinary charge of $1.8 million, or $.01 per share, on the write-off of deferred financing costs associated with the former agreement. As of January 30, 1999, the entire $500 million was available for use. The Company’s strong cash position throughout fiscal 1999 and 1998 required minimal short-term borrowings during those years. There were no U.S. short-term borrowings outstanding during fiscal 1999 or fiscal 1998. The maximum amount of U.S. short-term borrowings outstanding during fiscal 1997 was $3 million. The Company also has C$40 million of credit lines for its Canadian operations, all of which were available for use as of January 30, 1999. The maximum amount outstanding under its Canadian credit line during fiscal 1999, 1998 and 1997 was C$15.6 million, C$12.1 million and C$6 million, respectively. The Company currently has a shelf registration statement which provides for the issuance of up to $600 million of debt or equity. Management believes that its current credit facilities and availability under its shelf registration statement are more than adequate to meet its needs. See Notes B and F to the consolidated financial statements for further information regarding the Company’s long-term debt, capital stock transactions and available financing sources.
The Company is exposed to foreign currency exchange rate risk on its investment in its Canadian (Winners) and European (T.K. Maxx) operations. As more fully described in Note C to the consolidated financial statements, the Company hedges a large portion of its net investment and certain merchandise commitments in these operations with derivative financial instruments. The Company utilizes currency forward and swap contracts, designed to offset the gains or losses in the underlying exposures, most of which are recorded directly in shareholders’ equity. The contracts are executed with creditworthy banks and are denominated in currencies of major industrial countries. The Company does not enter into derivatives for speculative trading purposes.
The Company has performed a sensitivity analysis assuming a hypothetical 10% adverse movement in foreign exchange rates applied to the hedging contracts and the underlying exposures described above. As of January 30, 1999, the analysis indicated that such market movements would not have a material effect on the Company’s consolidated financial position, results of operations or cash flows.