-----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, IZxFAerdFayxbNNqL+uz425k/C1CPN0iaKKDDzPSHn0cTUZYbsvNSrV6gNBXqlG/ FN/RksoGSDXJTUBj0d9SYQ== 0000950144-98-007217.txt : 19980609 0000950144-98-007217.hdr.sgml : 19980609 ACCESSION NUMBER: 0000950144-98-007217 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980131 FILED AS OF DATE: 19980608 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BELK INC CENTRAL INDEX KEY: 0001051771 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-VARIETY STORES [5331] IRS NUMBER: 562058574 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 333-42935 FILM NUMBER: 98643979 BUSINESS ADDRESS: STREET 1: 2801 WEST TYVOLA ROAD CITY: CHARLOTTE STATE: NC ZIP: 28217-4500 MAIL ADDRESS: STREET 1: 2801 WEST TYVOLA ROAD CITY: CHARLOTTE STATE: NC ZIP: 28217-4500 10-K405 1 BELK INC 10-K405 1-31-1998 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JANUARY 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NUMBER 333-42935 BELK, INC. (Exact name of registrant as specified in its charter) DELAWARE 56-2058574 (State of incorporation) (IRS Employer Identification No.) 2801 WEST TYVOLA ROAD, CHARLOTTE, NORTH 28217-4500 CAROLINA (Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (704) 357-1000 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: None --------------------- Pursuant to Rule 15d-2 of the Act, this annual report contains only financial statements for the fiscal year ended January 31, 1998. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ ] No [X] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the common equity held by non-affiliates of the Registrant (assuming for these purposes, but without conceding, that all executive officers and directors are "affiliates" of the Registrant) as of May 2, 1998 (based on the pro forma book value per share of Class A Common Stock of the Registrant, as shown in the Registrant's Registration Statement on Form S-4, File No. 3333-42935) was $262,552,989. 56,005,817 shares of common stock were outstanding as of May 2, 1998, comprised of 56,005,817 shares of the registrant's Class A Common Stock, par value $0.01, and zero shares of the registrant's Class B Common Stock, par value $0.01. DOCUMENTS INCORPORATED BY REFERENCE Not applicable. ================================================================================ 2 TABLE OF CONTENTS PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K THIS FORM 10-K AND OTHER STATEMENTS ISSUED OR MADE FROM TIME TO TIME BY BELK, INC. OR ITS REPRESENTATIVES CONTAIN STATEMENTS WHICH MAY CONSTITUTE "FORWARD LOOKING STATEMENTS" UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THOSE STATEMENTS INCLUDE STATEMENTS REGARDING THE INTENT, BELIEF OR CURRENT EXPECTATIONS OF BELK, INC. AND MEMBERS OF ITS MANAGEMENT TEAM, AS WELL AS THE ASSUMPTIONS ON WHICH SUCH STATEMENTS ARE BASED. PROSPECTIVE INVESTORS ARE CAUTIONED THAT ANY SUCH FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES AND THAT ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE OR REVISE FORWARD-LOOKING STATEMENTS TO REFLECT CHANGED ASSUMPTIONS, THE OCCURRENCE OF UNANTICIPATED EVENTS OR CHANGES TO FUTURE OPERATING RESULTS OVER TIME. i 3 PART II ITEM 8. FINANCIAL STATEMENTS AND SCHEDULES The following combined financial statements of the Belk Companies, as predecessor to Belk, Inc. are included in Item 8:
PAGE ---- Independent Auditors Report................................. 2 Combined Statements of Income............................... 3 Combined Balance Sheets..................................... 4 Combined Statements of Shareholders' Equity................. 5 Combined Statements of Cash Flows........................... 6 Notes to Combined Financial Statements...................... 7
1 4 INDEPENDENT AUDITORS' REPORT The Boards of Directors of The Belk Companies: We have audited the accompanying combined balance sheets of the Belk Companies (the "Companies") as of January 31, 1998 and February 1, 1997, and the related combined statements of income, shareholders' equity and cash flows for each of the years in the three-year period ended January 31, 1998. These combined financial statements are the responsibility of the Companies' management. Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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 audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of the Belk Companies as of January 31, 1998 and February 1, 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended January 31, 1998, in conformity with generally accepted accounting principles. As discussed in note 4 to the combined financial statements, the Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," during fiscal year 1997. KPMG PEAT MARWICK LLP Charlotte, North Carolina April 17, 1998 2 5 THE BELK COMPANIES COMBINED STATEMENTS OF INCOME
FISCAL YEAR ENDED --------------------------------------- JANUARY 31, FEBRUARY 1, FEBRUARY 3, 1998 1997 1996 ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Revenues................................................... $1,974,102 $1,772,613 $1,685,470 Cost of goods sold (including occupancy and buying expenses)................................................ 1,317,278 1,205,687 1,149,270 Selling, general and administrative expenses............... 543,245 466,841 465,375 Impairment of long-lived assets............................ 6,260 3,177 -- ---------- ---------- ---------- Income from operations..................................... 107,319 96,908 70,825 Interest expense........................................... (39,950) (27,554) (20,864) Interest income............................................ 5,288 4,873 4,191 Gain (loss) on sale of property and equipment.............. (1,058) 21,328 5,242 Other income, net.......................................... 1,320 3,698 3,327 ---------- ---------- ---------- Income from continuing operations before income taxes and equity in earnings of unconsolidated entities............ 72,919 99,253 62,721 Income taxes............................................... 29,900 38,802 22,387 ---------- ---------- ---------- Income from continuing operations before equity in earnings of unconsolidated entities............................... 43,019 60,451 40,334 Equity in earnings of unconsolidated entities, net of income taxes............................................. 16,653 4,046 2,184 ---------- ---------- ---------- Income from continuing operations.......................... 59,672 64,497 42,518 Discontinued operations: Income (loss) from discontinued operations, net of income tax expense (benefit) of $(814), $(2,937) and $834 for fiscal years 1998, 1997 and 1996, respectively........ (1,273) (4,593) 1,298 Gain (loss) on disposal of discontinued operations, net of income tax expense (benefit) of $(2,411) and $29,897 for fiscal years 1998 and 1997, respectively.......................................... (3,999) 41,466 -- ---------- ---------- ---------- Net income....................................... $ 54,400 $ 101,370 $ 43,816 ========== ========== ==========
See accompanying notes to combined financial statements. 3 6 THE BELK COMPANIES COMBINED BALANCE SHEETS
JANUARY 31, FEBRUARY 1, 1998 1997 ----------- ----------- (IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents................................. $ 16,263 $ 56,115 Accounts receivable, net.................................. 353,509 335,914 Merchandise inventory..................................... 431,169 425,415 Prepaid income taxes...................................... 5,226 2,682 Deferred income taxes..................................... 7,438 6,990 Prepaid expenses and other current assets................. 26,453 26,646 ---------- ---------- Total current assets.............................. 840,058 853,762 Investments in unconsolidated entities...................... 38,846 33,750 Investment securities....................................... 37,223 32,781 Property and equipment, net................................. 395,771 377,770 Intangible assets, net...................................... 17,620 26,047 Other assets................................................ 18,984 34,790 ---------- ---------- Total assets...................................... $1,348,502 $1,358,900 ========== ========== LIABILITIES, DEFERRED INCOME AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 123,573 $ 126,710 Accrued expenses.......................................... 67,520 59,709 Accrued income taxes...................................... 3,363 5,680 Lines of credit and notes payable......................... 59,323 187,272 Current installments of long-term debt and capital lease obligations............................................ 89,133 31,638 ---------- ---------- Total current liabilities......................... 342,912 411,009 Deferred income taxes....................................... 28,866 31,481 Long-term debt and capital lease obligations, excluding current installments...................................... 210,449 184,372 Deferred compensation and other noncurrent liabilities...... 50,508 48,121 ---------- ---------- Total liabilities................................. 632,735 674,983 ---------- ---------- Deferred income............................................. 11,982 11,901 ---------- ---------- Shareholders' equity: Common stock.............................................. 70,629 70,885 Paid-in capital........................................... 470 470 Retained earnings......................................... 618,834 578,525 Net unrealized gains on investments....................... 13,852 22,136 ---------- ---------- Total shareholders' equity........................ $ 703,785 $ 672,016 ---------- ---------- Total liabilities, deferred income and shareholders' equity............................ $1,348,502 $1,358,900 ========== ==========
See accompanying notes to combined financial statements. 4 7 THE BELK COMPANIES COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
NET UNREALIZED COMMON PAID-IN RETAINED GAINS ON STOCK CAPITAL EARNINGS INVESTMENTS TOTAL ------- ------- -------- ----------- -------- (IN THOUSANDS) Balance at January 31, 1995............ $90,105 $478 $612,091 $14,609 $717,283 Unrealized gains on investments, net of income taxes......................... -- -- -- 1,574 1,574 Equity in net unrealized gains on investments held by unconsolidated entity............................... -- -- -- 2,868 2,868 Cash dividends......................... -- -- (11,673) -- (11,673) Net income............................. -- -- 43,816 -- 43,816 Repurchase of stock.................... (1,156) (8) (3,998) -- (5,162) ------- ---- -------- ------- -------- Balance at February 3, 1996............ 88,949 470 640,236 19,051 748,706 Unrealized gains on investments, net of income taxes......................... -- -- -- 733 733 Equity in net unrealized gains on investments held by unconsolidated entity............................... -- -- -- 2,352 2,352 Cash dividends......................... -- -- (11,847) -- (11,847) Net income............................. -- -- 101,370 -- 101,370 Repurchase of stock.................... (18,064) -- (151,234) -- (169,298) ------- ---- -------- ------- -------- Balance at February 1, 1997............ 70,885 470 578,525 22,136 672,016 Unrealized gains on investments, net of income taxes......................... -- -- -- 3,137 3,137 Net realized gains on investments held by unconsolidated entity............. -- -- -- (11,421) (11,421) Cash dividends......................... -- -- (8,936) -- (8,936) Net income............................. -- -- 54,400 -- 54,400 Repurchase of stock.................... (256) -- (5,155) -- (5,411) ------- ---- -------- ------- -------- Balance at January 31, 1998............ $70,629 $470 $618,834 $13,852 $703,785 ======= ==== ======== ======= ========
See accompanying notes to combined financial statements. 5 8 THE BELK COMPANIES COMBINED STATEMENTS OF CASH FLOWS
FISCAL YEAR ENDED ----------------------------------------- JANUARY 31, FEBRUARY 1, FEBRUARY 3, 1998 1997 1996 ----------- ----------- ----------- (IN THOUSANDS) Cash flows from operating activities: Net income................................................ $ 54,400 $101,370 $ 43,816 Adjustments to reconcile net income to net cash provided by operating activities: Deferred income taxes..................................... (4,326) 175 (1,338) Deferred income........................................... 81 759 910 Depreciation and amortization............................. 54,081 51,021 50,832 Impairment of long-lived assets........................... 6,260 3,177 -- (Gain) loss on disposal of discontinued operations, net... 3,999 (41,466) -- (Gain) loss on sale of property and equipment............. 1,058 (21,328) (5,242) Gain on sale of investments............................... (461) (1,882) (3,370) Equity in earnings of unconsolidated entities, net of income taxes............................................ (16,653) (4,046) (2,184) (Increase) decrease in: Accounts receivable, net................................ (17,595) (32,729) (23) Merchandise inventory................................... (5,754) 17,462 (16,292) Prepaid income taxes.................................... (2,544) (606) (1,824) Prepaid expenses and other assets....................... 18,732 6,706 (2,127) Increase (decrease) in: Accounts payable and accrued expenses................... 553 (8,070) (8,151) Accrued income taxes.................................... (2,317) 2,357 (5,495) Deferred compensation and other liabilities............. 2,387 (5,607) 10,875 -------- -------- -------- Net cash provided by operating activities................... 91,901 67,293 60,387 -------- -------- -------- Cash flows from investing activities: Distributions received from real estate partnership....... -- 3,375 -- Purchases of investments.................................. (4,403) (16,338) (6,545) Proceeds from sales of investments........................ 5,673 16,583 16,752 Purchases of property and equipment....................... (77,295) (62,408) (50,329) Proceeds from sales of property and equipment............. 2,996 27,275 9,589 Acquisition of businesses, net of cash acquired........... -- (36,145) (82,954) -------- -------- -------- Net cash used by investing activities....................... (73,029) (67,658) (113,487) -------- -------- -------- Cash flows from financing activities: Proceeds from notes payable............................... 24,541 158,018 104,840 Payments on notes payable................................. (122,796) (91,023) -- Proceeds from issuance of long-term debt.................. 175,351 220,157 11,177 Principal payments on long-term debt and capital lease obligations............................................. (91,779) (160,168) (64,126) Net proceeds from (payments on) lines of credit........... (29,694) 36,233 487 Dividends paid............................................ (8,936) (11,847) (11,673) Repurchase of common stock................................ (5,411) (169,298) (5,162) -------- -------- -------- Net cash provided (used) by financing activities............ (58,724) (17,928) 35,543 -------- -------- -------- Net decrease in cash and cash equivalents................... (39,852) (18,293) (17,557) Cash and cash equivalents at beginning of year.............. 56,115 74,408 91,965 -------- -------- -------- Cash and cash equivalents at end of year........... $ 16,263 $ 56,115 $ 74,408 ======== ======== ======== Supplemental disclosures of cash flow information: Interest paid............................................. $ 40,489 $ 31,129 $ 18,700 Income taxes paid......................................... 38,965 33,062 31,323 Supplemental schedule of noncash investing and financing activities: Decrease in assets and liabilities due to sale of rental operations.............................................. -- 167,318 -- Purchase of net assets of retail company through assumption of notes..................................... -- 51,923 --
See accompanying notes to combined financial statements. 6 9 THE BELK COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS (1) BASIS OF PRESENTATION The Belk Companies (also referred to herein as the "Company") operate retail department stores in the southeastern United States. The Company's outlet store subsidiary is presented as a discontinued operation. The Belk Companies are listed in note 18. As of January 31, 1998, ownership of the entities included in the Belk Companies was collectively held by approximately 585 individuals (referred to herein as the "Shareholders"). Subsequent to year end, the Shareholders approved and adopted an Agreement and Plan of Reorganization dated November 25, 1998, as amended, by and among the Belk Companies, Belk, Inc. and Belk Acquisition Co. (the "Reorganization Agreement") that provided for the reorganization (the "Reorganization") of the Belk Companies into a single operating entity ("Belk, Inc."). The Reorganization became effective on May 2, 1998. Pursuant to the Reorganization, all of the Belk Companies merged with and into Belk, Inc., with Belk, Inc. as the surviving corporation, and Belk Acquisition Co. merged with and into Belk-Simpson Company, Greenville, South Carolina ("Belk-Simpson"), with Belk-Simpson surviving as a wholly-owned subsidiary of Belk, Inc. The accompanying combined financial statements have been prepared for purposes of depicting the combined financial position and results of operations of the Belk Companies, on a historical cost basis, that participated in the Reorganization. Subsequent to year end, a majority of the shareholders redeemed their shares in Belk-Simpson (the "Belk-Simpson Reorganization," see note 2). The prorata equity interest in Belk-Simpson held by shareholders who became shareholders of Belk, Inc. in the Reorganization is included in the combined financial statements based on the equity method of accounting. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. All significant intercompany transactions, balances and profits have been eliminated in combination. (2) PRO FORMA CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) As discussed in note 1 above, on April 15 and 16, 1998, the shareholders voted to approve the Reorganization. The following unaudited pro forma condensed statements of operations are based upon the combined financial statements of the Belk Companies, adjusted to give effect to the Reorganization and the acquisition of Leggett (see note 3) and Belk-Simpson as if they had occurred at the beginning of each period presented. The unaudited pro forma condensed statements of operations reflect the preliminary allocation of the purchase price as the purchase price allocation has not been finalized. In accordance with the Belk-Simpson Reorganization, Belk-Simpson sold substantially all of its investment assets and used the proceeds to purchase common stock of Belk-Simpson. Of the 99,008 shares of common stock of Belk-Simpson that were outstanding at the time of the offer, 63,077 shares were tendered and purchased by Belk-Simpson for an aggregate purchase price of approximately $68 million. Belk-Simpson is included in the historical financial statements of the Belk Companies as a 37% equity investment. The unaudited pro forma condensed statements of operations reflect 100% of the Belk-Simpson retail operations and exclude the sold investment assets. 7 10 THE BELK COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) The Reorganization is reflected in the following unaudited pro forma condensed statements of operations as a purchase business combination in accordance with the provisions of Accounting Principles Board Opinion Number 16, and the Security Exchange Commission's Staff Accounting Bulletin Number 97. Belk Enterprises, Inc. is deemed to be the acquiring corporation in the Reorganization because its shareholders will receive a larger portion of the voting rights in Belk, Inc. than any other Belk Company.
FISCAL YEAR ENDED ------------------------------------------------- JANUARY 31, 1998 FEBRUARY 1, 1997 ----------------------- ----------------------- REPORTED PRO FORMA REPORTED PRO FORMA ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues........................................ $1,974,102 $2,042,266 $1,772,613 $2,060,236 Net income...................................... 54,400 42,389 101,370 123,880 Net income per share............................ n/a 0.76 n/a 2.21
(3) ACQUISITIONS AND DISCONTINUED OPERATIONS On November 1, 1996, the Company acquired substantially all of the outstanding shares of the common stock of Leggett of Virginia, Inc. ("Leggett"). Leggett operated retail department stores generally in the southeastern United States. The acquisition was accounted for using the purchase method of accounting and, accordingly, Leggett's operating results subsequent to the date of acquisition have been included in the Company's combined financial statements. The aggregate purchase price was approximately $92 million, which includes acquisition expenses. The aggregate purchase price, which was financed through available cash resources, proceeds from a credit facility and notes held by previous Leggett shareholders, has been allocated to the assets and liabilities of Leggett based upon their respective fair market values. The excess of purchase price over net assets acquired of approximately $12.5 million is being amortized over 15 years on a straight-line basis. In November 1995, BAC, Inc., ("BAC"), a wholly-owned subsidiary of the Company, purchased all of the stock of Ivey Properties, Inc., ("Ivey"), a real estate investment trust. The largest holding of Ivey was an interest in JV Properties ("JV"), a retail mall joint venture. The acquisition was accounted for as a purchase. Prior to the purchase, the Company's ownership of JV was accounted for using the equity method of accounting. Subsequent to the purchase, the Company consolidated the assets, liabilities and operations of JV, which was comprised of the operations of a shopping mall facility located in Charlotte, North Carolina. In November 1996, JV's interest in the retail mall, along with debt, was distributed to BAC in redemption of BAC's partnership interest in JV. Subsequently, the Company sold the stock of BAC to an unrelated third party and recognized a gain on the disposal of $41,466, net of income tax expense of $29,897. The accompanying combined financial statements present the results of operations of JV as discontinued operations. JV recorded revenues of $4,111 for the three months ended February 3, 1996 (after purchasing the net assets from Ivey) and $11,897 for the year ended February 1, 1997. In September 1997, the managers and the advisory board of TAGS Stores, LLC, ("TAGS"), the Company's discount outlet store subsidiary, adopted a formal plan to liquidate its operations during the 1997 Christmas retailing season. Accordingly, the results of operations of TAGS are presented as discontinued operations. During the year ended January 31, 1998, the Company provided for losses on liquidation of the discontinued operations of $4.0 million, net of income tax benefit of $2.4 million. TAGS, which was formed in February 1996, recorded revenues of $25.9 and $18.5 million for fiscal years 1998 and 1997, respectively. 8 11 THE BELK COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) (4) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES FISCAL YEAR Starting in fiscal year 1996, the Company's fiscal year ends on the Saturday closest to each January 31. Fiscal years 1998 and 1997 ended on January 31, 1998 and February 1, 1997, respectively, and included 364 days. Fiscal year 1996 ended on February 3, 1996 and included 368 days. REVENUES Revenues include sales from retail operations and leased departments, net of returns. Customer returns are recognized as incurred. COST OF GOODS SOLD Cost of goods sold includes occupancy and buying expenses. Occupancy expenses include rent, utilities and real estate taxes. Buying expenses include payroll and travel expenses associated with the buying function. MERCHANDISE INVENTORY Merchandise inventory is stated at the lower of average cost or market as determined by the retail inventory method. FINANCE CHARGES Selling, general and administrative expenses in the combined statements of income are reduced by finance charge revenue arising from customer accounts receivable. Finance charge revenues were $43,788, $37,562 and $33,014 in fiscal years 1998, 1997 and 1996, respectively. PROPERTY AND EQUIPMENT, NET Property and equipment owned by the Company is stated at cost less accumulated depreciation. Property and equipment leased by the Company under capital leases is stated at an amount equal to the present value of the minimum lease payments less accumulated amortization. Depreciation and amortization are provided utilizing straight-line and various accelerated methods over the shorter of estimated asset lives or related lease terms. INCOME TAXES Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement bases and the respective tax bases of the assets and liabilities and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. PRE-OPENING COSTS Store pre-opening costs are expensed as incurred. 9 12 THE BELK COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) CASH EQUIVALENTS Cash equivalents include liquid investments with an original maturity of 90 days or less. ADVERTISING Advertising costs are expensed as incurred and amounted to $61,326, $54,977 and $55,118 in fiscal years 1998, 1997 and 1996, respectively, net of reimbursements by suppliers. INTANGIBLE ASSETS, NET Goodwill, which represents the excess of purchase price over fair value of net assets acquired, is amortized on a straight-line basis over the expected periods to be benefited, generally 15 years. Leasehold intangibles, which represent the excess of fair value over the carrying value of leaseholds, are amortized on a straight-line basis over the remaining terms of the lease agreements. The carrying value of intangible assets is periodically reviewed by the Company's management to assess the recoverability of the assets. Accumulated amortization was $4,017, $838 and $169 at January 31, 1998, February 1, 1997 and February 3, 1996, respectively. DERIVATIVE FINANCIAL INSTRUMENTS The Company utilizes various derivative financial instruments (interest rate swap agreements) to manage the interest rate risk associated with its borrowings. The counterparties to these instruments are major financial institutions. These agreements are used to reduce the potential impact of increases in interest rates on variable rate long-term debt. The differential to be paid or received is accrued as interest rates change and is recognized as an adjustment to interest expense. The fair value of the swap agreements is not recognized in the combined financial statements. IMPAIRMENT CHARGE During fiscal 1997, the Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which addresses the identification and measurement of asset impairments and requires the recognition of impairment losses on long-lived assets when carrying values exceed expected future cash flows. The Company evaluated its investment in long-lived assets on an individual store basis. Based upon an assessment of historical and projected operating results, it was determined that the carrying value of certain operating stores was impaired under the criteria defined in SFAS No. 121. As a result, the Company recorded pre-tax impairment charges of $6,260 and $3,177 for fiscal years 1998 and 1997, respectively to reduce the carrying value of these assets to their estimated fair value. RECLASSIFICATIONS Certain reclassifications have been made to prior years' financial statements to conform with the classification used in the financial statements for the fiscal year ended January 31, 1998. (5) ACCOUNTS RECEIVABLE, NET Customer receivables arise primarily under open-end revolving credit accounts used to finance purchases of merchandise from the Company. These accounts have various billing and payment structures, including varying minimum payment levels and finance charge rates. Installments of deferred payment accounts receivable maturing after one year are included in current assets in accordance with industry practice. 10 13 THE BELK COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) The Company provides an allowance for doubtful accounts which is determined based on a number of factors, including the risk characteristics of the portfolio, historical charge-off patterns and management judgment. Accounts receivable, net consists of:
JANUARY 31, FEBRUARY 1, 1998 1997 ----------- ----------- (DOLLARS IN THOUSANDS) Customer receivables........................................ $349,641 $326,907 Other....................................................... 12,274 15,820 Less allowance for doubtful accounts........................ (8,406) (6,813) -------- -------- Accounts receivable, net.......................... $353,509 $335,914 ======== ========
Changes in the allowance for doubtful accounts are as follows:
FISCAL YEAR ENDED --------------------------------------- JANUARY 31, FEBRUARY 1, FEBRUARY 3, 1998 1997 1996 ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Balance, beginning of year............................ $ 6,813 $ 4,883 $ 4,770 Charged to expense.................................... 13,181 10,829 5,403 Acquired.............................................. -- 801 -- Net uncollectible balances written off................ (11,588) (9,700) (5,290) -------- ------- ------- Balance, end of year........................ $ 8,406 $ 6,813 $ 4,883 ======== ======= =======
(6) INVESTMENTS IN UNCONSOLIDATED ENTITIES The Company's 25% ownership in Carolina Place Associates Partnership ("CPA") is recorded on the equity method. Equity in earnings of CPA for the year ended February 1, 1997 includes $3,072, net of income tax expense of $1,973, for the Company's portion of the gain recognized by CPA for the sale of its investment in a retail mall joint venture. The Company's 37% investment in Belk-Simpson is recorded on the equity method (see note 1). Equity in earnings of Belk-Simpson in fiscal years 1998, 1997 and 1996 were $16,653, $974 and $2,184, respectively. Condensed combined financial information of the unconsolidated entities is as follows:
JANUARY 31, FEBRUARY 1, FEBRUARY 3, 1998 1997 1996 ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Current assets........................................ $122,697 $ 31,034 $31,551 Noncurrent assets..................................... 36,408 110,074 91,603 Current liabilities................................... 17,720 22,885 20,337 Noncurrent liabilities................................ 31,638 22,219 18,299 Shareholders' equity.................................. 109,387 96,004 84,518 Revenues.............................................. 68,163 69,621 72,482 Net income.................................. $ 45,624 $ 3,445 $ 7,537
Included in retained earnings of the combined financial statements at January 31, 1998 is undistributed earnings of approximately $23,940 from the unconsolidated entities. 11 14 THE BELK COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) (7) INVESTMENT SECURITIES The Company classifies as held-to-maturity securities all debt securities that the Company has the ability and intent to hold to maturity. All equity securities and all other debt securities with a readily determinable market value are classified as available-for-sale securities with unrealized gains and losses, net of income taxes, reported as a component of shareholders' equity. Held-to-maturity securities consist of federal, state and local debt securities, and are reported at amortized cost. Available-for-sale securities are reported at fair values. Details of investments in held-to-maturity securities are as follows:
JANUARY 31, FEBRUARY 1, 1998 1997 ----------- ----------- (DOLLARS IN THOUSANDS) Amortized cost.............................................. $10,480 $12,130 Gross unrealized gains...................................... 626 494 Gross unrealized losses..................................... -- (8) ------- ------- Fair value........................................ $11,106 $12,616 ======= =======
At January 31, 1998, scheduled maturities of held-to-maturity securities are as follows:
AMORTIZED FAIR VALUE COST ----------- ----------- (DOLLARS IN THOUSANDS) One to five years........................................... $ 4,978 $ 4,799 Six to ten years............................................ 3,616 3,329 After ten years............................................. 2,512 2,352 ------- ------- $11,106 $10,480 ======= =======
Details of investments in available-for-sale securities are as follows:
JANUARY 31, FEBRUARY 1, 1998 1997 ----------- ----------- (DOLLARS IN THOUSANDS) Cost........................................................ $ 4,660 $ 3,506 Gross unrealized gains...................................... 22,141 17,165 Gross unrealized losses..................................... (58) (20) ------- ------- Fair value of securities.......................... $26,743 $20,651 ======= =======
Realized gains and losses on sales of securities are recognized on a specific identification basis. Gross realized gains included in income in fiscal years 1998, 1997 and 1996 were $546, $1,966 and $3,486, respectively, and gross realized losses included in income in fiscal years 1998, 1997 and 1996 were $85, $84 and $116, respectively. 12 15 THE BELK COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) (8) PROPERTY AND EQUIPMENT, NET Details of property and equipment are as follows:
ESTIMATED JANUARY 31, FEBRUARY 1, LIVES 1998 1997 --------- ----------- ----------- (DOLLARS IN THOUSANDS) Land.................................................. N/A $ 20,337 $ 20,340 Buildings............................................. 30-50 423,962 395,443 Furniture, fixtures and equipment..................... 5-7 432,425 410,588 Construction in progress.............................. N/A 8,282 12,146 ----------- ----------- 885,006 838,517 Less accumulated depreciation and amortization........ (489,235) (460,747) ----------- ----------- Property and equipment, net................. $ 395,771 $ 377,770 =========== ===========
(9) ACCRUED EXPENSES Accrued expenses are comprised of the following:
JANUARY 31, FEBRUARY 1, 1998 1997 ----------- ----------- (DOLLARS IN THOUSANDS) Salaries, wages and employee benefits....................... $33,141 $28,913 Interest.................................................... 4,773 5,277 Rent........................................................ 4,505 4,524 Taxes, other than income.................................... 3,721 3,781 Other....................................................... 21,380 17,214 ------- ------- $67,520 $59,709 ======= =======
(10) BORROWINGS Long-term debt, principally due to banks, and capital lease obligations consist of the following:
JANUARY 31, FEBRUARY 1, 1998 1998 ----------- ----------- (DOLLARS IN THOUSANDS) Mortgage notes payable...................................... $ 39,898 $ 41,831 Unsecured notes payable..................................... 248,128 163,053 Secured note payable........................................ -- 2,612 Capital lease agreements through July 2017.................. 11,556 8,514 -------- -------- 299,582 216,010 Less current installments................................... (89,133) (31,638) -------- -------- Long-term debt and capital lease obligations, excluding current installments...................................... $210,449 $184,372 ======== ========
The mortgage notes are payable in installments and are due through June 2003, at fixed rates ranging from 6.7% to 9.625% and at variable rates based on the secondary 90 day CD rate plus 50 basis points and LIBOR plus 50 and 80 basis points. The unsecured notes are payable in installments and are due through January 2007, at fixed rates ranging from 6.75% to 8% and variable rates based on such bank's 90 day CD rate (as defined by the Bank) plus 50 basis points and LIBOR plus from 80 to 125 basis points. On January 31, 1998, the prime and LIBOR rates were 8.5% and 5.598%, respectively. 13 16 THE BELK COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Carrying values of land, buildings and personal property pledged as collateral for the mortgage notes were approximately $48,533 at January 31, 1998. The annual maturities of long-term debt and capital lease obligations over the next five years as of January 31, 1998 are $89,133, $37,473, $45,181, $30,234 and $32,314, respectively. The Company's loan agreements place restrictions on mergers, consolidations, acquisitions, sales of assets, transactions with affiliates, leases, liens, dividend payments, debt and investments. They also contain certain financial requirements including current ratio, debt to equity, tangible net worth, cash flow coverage and fixed charge coverage ratios. The Company has obtained waivers for any out-of-compliance conditions. The Company has entered into interest rate swap agreements with various financial institutions to manage the exposure to changes in interest rates on its LIBOR based indebtedness. The amount of indebtedness covered by the interest rate swaps is $175 million at January 31, 1998, $150 million for 1999, $75 million for 2000 and 2001, and $50 million through 2007. At January 31, 1998, the Company has short-term loan agreements outstanding totaling $41,297 at variable interest rates based on LIBOR plus from 80 to 175 basis points, prime less 50 basis points and at the fixed rate of 6%. Approximately $30 million of the short-term loan agreements outstanding are secured by customer accounts receivable. The amount outstanding under short-term loan agreements at February 1, 1997 was $139,552 and was at variable interest rates based on LIBOR plus from 50 to 180 basis points and at the fixed rate of 5.6%. At January 31, 1998 and February 1, 1997, the Company has unsecured line of credit agreements totaling $163,500 and $213,870, respectively, with banks at varying interest rates based on LIBOR plus from 50 to 175 basis points and at such bank's cost of funds rate (as defined by the Bank) less 50 basis points. The agreements expire through September 30, 1998 and may be renewed upon mutual agreement between the parties. The amounts outstanding under these agreements at January 31, 1998 and February 1, 1997 were $18,026 and $47,720, respectively. (11) LEASES The Company leases certain of its stores, warehouse facilities and equipment. The majority of these leases will expire over the next 10 years. The leases usually contain renewal options and provide for payment by the lessee of real estate taxes and other expenses and, in certain instances, increased rentals based on percentages of sales. Future minimum lease payments under noncancelable leases as of January 31, 1998 were as follows:
FISCAL YEAR CAPITAL OPERATING - ----------- --------- ----------- (DOLLARS IN THOUSANDS) 1999........................................................ $ 1,466 $ 34,674 2000........................................................ 1,466 32,294 2001........................................................ 1,382 28,993 2002........................................................ 1,322 27,503 2003........................................................ 1,325 26,692 After 2003.................................................. 9,952 145,318 ------- -------- Total............................................. 16,913 $295,474 ======== Less imputed interest....................................... (5,357) ------- Present value of minimum lease payments..................... 11,556 Less current portion........................................ (808) ------- $10,748 =======
14 17 THE BELK COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Rental expense for all operating leases consists of the following:
FISCAL YEAR ENDED --------------------------------------- JANUARY 31, FEBRUARY 1, FEBRUARY 3, 1998 1997 1996 ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Buildings: Minimum rentals..................................... $32,941 $29,982 $26,091 Contingent rentals.................................. 5,037 4,562 4,316 Equipment............................................. 10,385 10,484 10,630 ------- ------- ------- Total rental expense........................ $48,363 $45,028 $41,037 ======= ======= =======
Contingent rentals are determined on the basis of a percentage of sales in excess of stipulated minimums for certain store facilities. (12) INCOME TAXES Federal and state income tax expense (benefit) from continuing operations was as follows:
FISCAL YEAR ENDED --------------------------------------- JANUARY 31, FEBRUARY 1, FEBRUARY 3, 1998 1997 1996 ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Current: Federal............................................. $28,212 $31,427 $19,160 State............................................... 6,014 7,200 4,565 ------- ------- ------- 34,226 38,627 23,725 Deferred: Federal............................................. (3,280) 91 (578) State............................................... (1,046) 84 (760) ------- ------- ------- (4,326) 175 (1,338) ------- ------- ------- Income taxes.......................................... $29,900 $38,802 $22,387 ======= ======= =======
A reconciliation between income taxes from continuing operations computed using the effective income tax rate and the federal statutory income tax rate of 35% is as follows:
FISCAL YEAR ENDED --------------------------------------- JANUARY 31, FEBRUARY 1, FEBRUARY 3, 1998 1997 1996 ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Income tax at the statutory federal rate.............. $25,522 $34,739 $21,952 State income taxes, net of federal income tax benefit............................................. 3,229 4,735 2,473 Other................................................. 1,149 (672) (2,038) ------- ------- ------- Income taxes.......................................... $29,900 $38,802 $22,387 ======= ======= =======
15 18 THE BELK COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Deferred taxes based upon differences between the financial statement and tax bases of assets and liabilities and available tax carryforwards consist of:
JANUARY 31, FEBRUARY 1, 1998 1997 ----------- ----------- (DOLLARS IN THOUSANDS) Deferred tax assets: Benefit plan costs........................................ $ 15,512 $ 14,520 Tax carryovers............................................ 10,362 6,963 Inventory capitalization.................................. 4,512 4,469 Allowance for doubtful accounts........................... 3,183 2,521 Capitalized leases........................................ 843 970 Other..................................................... 9,599 6,626 -------- ----------- Gross deferred tax assets................................... 44,011 36,069 Less valuation allowance.................................... (2,705) (3,488) -------- ----------- Net deferred tax assets..................................... 41,306 32,581 Deferred tax liabilities: Investment securities..................................... 8,102 5,930 Property and equipment.................................... 17,161 16,104 Prepaid pension costs..................................... 846 1,529 Provision for gain on disposal of discontinued operations............................................. 29,897 29,897 Other..................................................... 6,728 3,612 -------- ----------- Gross deferred tax liabilities.............................. $ 62,734 $ 57,072 -------- ----------- Net deferred tax assets (liabilities)............. $(21,428) $ (24,491) ======== ===========
The change in the valuation allowance was a decrease of $783 and $2,191 for January 31, 1998 and February 1, 1997, respectively. In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the temporary differences becoming deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. As of January 31, 1998, the Company has net operating loss and contribution carryforwards for federal and state income tax purposes of approximately $20,819 and $44,389, respectively, which are available to offset future taxable income, if any. These carryforwards expire at various intervals through 2013. In addition, the Company has alternative minimum tax credit carryforwards of approximately $969 which are available to reduce future federal regular income taxes, if any, over an indefinite period. (13) PENSION BENEFITS The Company has a defined benefit pension plan covering substantially all of its employees. The benefits are based on years of service and the employee's compensation during the five years before retirement. The cost of pension benefits has been determined by the projected unit credit actuarial method in accordance with SFAS No. 87 "Employers' Accounting for Pensions." 16 19 THE BELK COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) The following table sets forth the plan's funded status and amounts recognized in the Company's combined balance sheets at January 31, 1998 and February 1, 1997:
JANUARY 31, FEBRUARY 1, 1998 1997 Actuarial present value of benefit obligations: ----------- ----------- (DOLLARS IN THOUSANDS) Vested benefit obligation................................... $185,868 $156,651 ======== ======== Accumulated benefit obligation.............................. $189,673 $159,054 ======== ======== Projected benefit obligation................................ $209,469 $183,083 Plan assets at fair value................................... 332,775 289,482 -------- -------- Plan assets in excess of projected benefit obligation....... 123,306 106,399 Unrecognized net gain....................................... (120,154) (94,136) Unrecognized prior service cost............................. 4,797 -- Unrecognized net asset at January 1, 1986 being recognized over 15 years............................................. (5,699) (7,664) -------- -------- Prepaid pension cost........................................ $ 2,250 $ 4,599 ======== ========
Net pension cost for fiscal years 1998, 1997 and 1996 includes the following components:
JANUARY 31, FEBRUARY 1, FEBRUARY 3, 1998 1997 1996 ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Service cost.......................................... $10,688 $10,657 $11,118 Interest cost on projected benefit obligation......... 14,924 13,202 13,196 Actual return on plan assets.......................... (20,064) (19,146) (18,021) Net amortization and deferral......................... (3,199) (2,998) (3,724) ------- ------- ------- Net pension cost...................................... $ 2,349 $ 1,715 $ 2,569 ======= ======= =======
Assumptions used in accounting for the pension plan as of January 31, 1998 and February 1, 1997 were:
JANUARY 31, FEBRUARY 1, FEBRUARY 3, 1998 1997 1996 ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Discount rates........................................ 7.25% 7.75% 7.25% Rates of increase in compensation levels.............. 4.00 4.00 4.00 Expected long-term rate of return on assets........... 8.50 8.50 8.50
(14) OTHER POSTRETIREMENT BENEFIT PLANS The Company has a defined benefit health care plan that provides postretirement medical and life insurance benefits to certain retired full-time employees. The Company accounts for postretirement benefits by recognizing the cost of these benefits over an employee's estimated term of service with the Company. 17 20 THE BELK COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) The following table presents the plan's funded status reconciled with amounts recognized in the Company's combined balance sheets at January 31, 1998 and February 1, 1997:
JANUARY 31, FEBRUARY 1, 1998 1997 ----------- ----------- (DOLLARS IN THOUSANDS) Accumulated postretirement benefit obligation: Retirees.................................................... $ 20,297 $ 16,295 Active plan participants.................................... 12,035 11,448 -------- -------- Accumulated postretirement benefit obligation............... 32,332 27,743 Unrecognized net obligation at February 1, 1993 being recognized over 20 years.................................. (14,022) (14,957) Unrecognized net loss....................................... (10,667) (6,884) -------- -------- Accrued postretirement benefit cost......................... $ 7,643 $ 5,902 ======== ========
Net postretirement benefit cost for fiscal years 1998, 1997 and 1996 includes the following components:
JANUARY 31, FEBRUARY 1, FEBRUARY 3, 1998 1997 1996 ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Service cost.......................................... $ 454 $ 455 $ 343 Interest cost......................................... 2,287 2,044 1,968 Net amortization and deferral......................... 1,329 1,298 1,104 ------ ------ ------ Net postretirement benefit cost....................... $4,070 $3,797 $3,415 ====== ====== ======
For measurement purposes, a 9.0% annual rate of increase in the per capita cost of covered benefits (i.e., health care cost trend rate) was assumed for fiscal year 1998; the rate was assumed to decrease gradually to 5.5% by fiscal year 2003 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. For example, increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of January 31, 1998 by $2,207 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year ended January 31, 1998 by $285. The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 7.25%, 7.75% and 7.25% at January 31, 1998, February 1, 1997, and February 3, 1996, respectively. (15) OTHER EMPLOYEE BENEFITS The Belk Employees' Group Medical Plan provides medical benefits to substantially all full-time employees of the Belk Companies. This Plan is "self-funded" for medical benefits through a 501(c)(9) Trust. The Group Life Insurance Plan, The Belk Employees Group Dental Insurance Plan and The Belk Employees Short Term Disability Insurance Plan provide insurance to substantially all full-time employees of the Belk Companies and are fully insured through contracts issued by insurance companies. Contributions by the Company under these plans amounted to approximately $11,584, $12,311 and $12,268 in fiscal years 1998, 1997 and 1996, respectively. The Belk 401(K) Savings Plan, a contributory, defined contribution multi-employer plan, provides benefits for substantially all employees of the Belk Companies. The costs of the plan generally represent 10% of profits, as defined, and amounted to approximately $16,292, $14,003 and $10,848 in fiscal years 1998, 1997 and 1996, respectively. 18 21 THE BELK COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Beginning on January 1, 1998, the contributions to the 401(K) Savings Plan are comprised of a matching contribution, generally 50% of the employees' contribution up to 6% of eligible compensation, and a basic contribution, generally 2% of eligible compensation, regardless of the employees' contributions The Supplemental Executive Retirement Plan ("SERP") is a non-qualified defined benefit retirement plan which provides retirement and death benefits to certain qualified executives of the Company. Total SERP costs charged to operations were approximately $1,336, $1,002 and $1,987 in fiscal years 1998, 1997 and 1996, respectively. The effective discount rate used in determining the net periodic SERP cost is 7.25%, 7.75% and 7.25% for fiscal years 1998, 1997 and 1996, respectively. Actuarial gains and losses are amortized over the average remaining service lives of the participants. Certain eligible employees participate in a non-qualified Deferred Compensation Plan ("DCP"). Participants in the plan have elected to defer a portion of their regular compensation subject to certain limitations prescribed by the DCP. The Company is required to pay interest on the employees' deferred compensation at various rates between 9% and 15%. Total interest expense related to this plan and charged to operations was approximately $3,028, $2,768 and $2,598 in fiscal years 1998, 1997 and 1996, respectively. (16) FAIR VALUE OF FINANCIAL INSTRUMENTS Carrying values approximate fair values for financial instruments that are short-term in nature, such as cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and lines of credit. The fair value of other financial instruments are as follows:
JANUARY 31, 1998 FEBRUARY 1, 1997 --------------------------- --------------------------- CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE -------------- ---------- -------------- ---------- (DOLLARS IN THOUSANDS) Notes payable........................... $ 41,297 $ 41,297 $139,552 $138,993 Long-term debt (excluding capitalized leases)............................... 288,026 290,574 207,496 209,487 Interest rate swap agreements........... -- (4,605) -- -- Investment securities................... 37,223 37,849 32,781 33,267
The fair value of the Company's fixed rate long-term debt and notes payable is estimated based on the current rates offered to the Company for debt of the same remaining maturities. The carrying values of the Company's variable rate long-term debt and notes payable are reasonable estimates of fair value. The fair value of interest rate swap agreements is the estimated amount that the Company would pay to terminate the swap agreement, taking into account current credit worthiness of the swap counterparties. (17) RELATED PARTY TRANSACTIONS The Company owns a 37% interest in Belk-Simpson, an affiliated retail company. The Company has outstanding receivable balances from Belk-Simpson of $12,038 and $10,541 at January 31, 1998 and February 1, 1997, respectively, which are included in prepaid expenses and other current assets in the combined balance sheets. The Company also has a loan payable to Belk-Simpson which is included in deferred compensation and other non-current liabilities in the combined balance sheets. The outstanding balances on this loan are $7,204 and $7,851 at January 31, 1998 and February 1, 1997, respectively. Various officers and directors of the Company have outstanding loans with the Company at a fixed rate of 7.5%. The balances of these loans are $981 and $2,226 as of January 31, 1998 and February 1, 1997, respectively. Various officers, directors and employees of the Company have demand deposits with the Company. The deposits are invested in highly liquid securities and other investments and earn interest at the 30 day secondary 19 22 THE BELK COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) CD rate less 50 basis points. The aggregate amount of demand deposits are $4,087 and $4,065 at January 31, 1998 and February 1, 1997, respectively. On November 21, 1996, several directors, executive officers, and their families sold 6,601.33 shares of common stock of the corporations that owned and operated the 42 Leggett stores acquired in the Leggett acquisition to Belk of Virginia, Inc. for $6,019. On August 1, 1997, Belk Finance Company guaranteed a $5,000 bank loan made to Brothers Investment Company. This loan bears interest at the prime rate as established by the Federal Reserve Bank, less 0.5% per annum, payable monthly, and is due on July 31, 1998. At January 31, 1998, this loan had an outstanding balance of $5,000. John M. Belk, the current Chairman of the Board of all of the Belk Companies, owns 50% of Brothers Investment Company and is a director of Brothers Investment Company. The estate of Thomas M. Belk, of which John M. Belk is a co-executor, owns the remaining 50% of Brothers Investment Company. (18) THE BELK COMPANIES The following list represents the related entities (referred to in note 1), included in the Belk Companies: Belk-Simpson Company of Paragould, Arkansas, Inc. Belk Department Store of Stuttgart, Ark., Inc. Belk-Lindsey Stores, Inc. Belk's Department Store of Albany, Georgia Belk of Americus, Ga., Inc. Belk of Athens, Ga., Inc. Belk-Simpson Co., of Bainbridge, Ga., Inc. Belk of Canton, Ga., Inc. Belk-Rhodes Company, of Carrollton, Ga. Belk's Department Store of Cartersville, Georgia, Incorporated Belk of Cornelia, Ga., Inc. Belk of Covington, Ga., Inc. Belk of Dalton, Ga., Inc. Belk-Matthews Company of Dublin, Georgia Belk of Hartwell, Ga., Inc. Belk of LaGrange, Ga., Inc. Belk of Lawrenceville, Ga., Inc. Belk-Matthews Company of Macon, Georgia Belk-Matthews Company of Milledgeville, Ga., Inc. Belk of Monroe, Ga., Inc. Belk of Newnan, Ga., Inc. Belk-Rhodes Company, (Rome, Georgia) Belk of Statesboro, Ga., Inc. Belk of Thomaston, Ga., Inc. Belk of Toccoa, Ga., Inc. Belk-Matthews Company, Vidalia, Georgia, Inc. Belk of Washington, Ga., Inc. Belk of Waycross, Ga., Inc. Belk-Simpson Company of Corbin, Kentucky, Incorporated Belk-Simpson Company of Harlan, Kentucky, Incorporated Belk of Miss., Inc. Belk Department Store of Ahoskie, N.C., Inc. 20 23 THE BELK COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Belk's Department Store of Albemarle, North Carolina, Incorporated Belk of Asheboro, N.C., Inc. Belk's Department Store of Asheville, North Carolina, Incorporated Belk-Matthews Company Belk's Department Store of Boone, North Carolina, Incorporated Belk's Department Store of Brevard, N.C. Incorporated Belk-Beck Company of Burlington, North Carolina, Inc. Belk Brothers Company Belk Enterprises, Inc. Belk-Matthews Company of Cherryville, N.C., Incorporated Belk Department Store of Clinton, N.C., Inc. Belk's Department Store of Dunn, North Carolina, Incorporated Belk Department Store of Eden, N.C., Inc. Belk Department Store of Elkin, N.C., Inc. Belk Department Store of Forest City, N.C., Inc. Hudson-Belk Co. of Fuquay-Varina, N.C., Inc. Matthews-Belk Company Belk Department Store of Greenville, N.C., Inc. Belk-Simpson Company of Hendersonville, N.C., Incorporated Belk Department Store of Hickory, N.C., Inc. Belk-Beck Co. of High Point, N.C., Inc. Belk's Department Store of Jacksonville, N.C., Inc. Belk's Department Store of Lenoir, North Carolina, Incorporated Belk Department Store of Lincolnton, N.C., Inc. Belk Brothers of Monroe, North Carolina, Incorporated Belk's Department Store of Morehead City, N.C., Inc. Belk's Department Store of Mount Airy, North Carolina, Incorporated Belk's Department Store of New Bern, N.C., Incorporated Hudson-Belk Company Belk Department Store of Reidsville, N.C., Inc. Belk's Department Store of Rockingham, N.C., Incorporated Belk-Harry Company -- Salisbury, N.C. Belk Department Store of Shelby, N.C., Inc. Belk of Siler City, N.C., Inc. Belk Department Store of Waynesville, N.C., Inc. Belk Department Store of Wilkesboro, N.C., Inc. Belk's Department Store, Incorporated of Aiken, South Carolina Gallant-Belk Company Belk's Department Store of Batesburg, S.C., Inc. Belk-Simpson Company, Incorporated of Beaufort, South Carolina Belk's Department Store of Camden, S.C., Incorporated Belk Department Store of Charleston, S.C., Inc. Belk's Department Store of Conway, S.C., Incorporated Belk's Department Store of Florence, S.C., Incorporated Belk's Department Store of Gaffney, South Carolina, Incorporated Belk of Georgetown, S.C., Inc. Belk Department Store of Greenwood, S.C., Inc. Belk's Department Store of Hartsville, S.C., Incorporated Belk's Department Store, Incorporated, of Lake City, South Carolina 21 24 THE BELK COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Belk's Department Store of Lancaster, S.C., Inc. Belk's Department Store of Laurens, South Carolina, Incorporated Belk of Orangeburg, S.C., Inc. Belk of Seneca, S.C., Inc. Belk of Spartanburg, S.C., Inc. Belk of Union, S.C., Inc. Belk of Walterboro, S.C., Inc. Belk's Department Store of Winnsboro, S.C., Incorporated Parks-Belk Company of Clarksville, Tennessee Belk Department Store of Greenville, Texas, Inc. Belk's Department Store of Paris, Texas, Inc. Parks-Belk Company, Incorporated Belk of Danville, Va., Inc. Belk of Lynchburg, Va., Inc. Belk Stores of Virginia, Inc. Belk of Roanoke, Va., Inc. Belk of South Boston, Va., Inc. Belk of Dawson, Ga., Inc. Belk of Elberton, Ga., Inc. Belk of Thomson, Ga., Inc. Belk Department Store of Edenton, N.C., Inc. Belk of Thomasville, N.C., Inc. Belk's Department Store of Chesterfield, S.C., Incorporated Belk's Department Store of Columbia, South Carolina, Incorporated Belk Finance Company Belk-Simpson Realty Company Belk of Lawrenceville, Va., Inc. Belk Realty of Radford, Va., Inc. Belk Realty of Staunton, Va., Inc. Belk Outlet Center, Inc. Belk of St. Augustine, Fla., Inc. Belk-Simpson Company of Somerset, Kentucky, Incorporated Belk Stores of Maryland, Inc. Belk Charlotte, Inc. Belk Department Store of Greensboro, N.C., Inc. Belk of Roanoke Rapids, N.C., Inc. Belk Department Store of North Augusta, S.C., Inc. Belk's Department Store of Rock Hill, S.C., Incorporated Belk Department Store of Chattanooga, Tennessee, Incorporated Parks-Belk Company of Wise, Virginia, Incorporated Belk of West Virginia, Inc. Belk Brothers Properties, Inc. Belk Investment Company Belk of Virginia, Inc. Belk of Delaware, Inc. Archdale Advertising Agency, Inc. Belk Leasing Company Belk Stores Services, Inc. United Electronic Services, Inc. 22 25 THE BELK COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Belk Stores Mutual Insurance Company The Belk Center, Inc. Belk International, Inc. TAGS Stores, LLC Belk, Inc. Belk Funding, LLC 23 26 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (A) FINANCIAL STATEMENTS AND SCHEDULES 1. Financial Statements A. Historical Combined Financial Statements of Belk, Inc. (See page 1) Report of Independent Certified Public Accountants. Combined Statements of Income for the years ended January 31, 1998, February 1, 1997 and February 3, 1996. Combined Balance Sheets as of January 31, 1998 and February 1, 1997. Combined Statements of Shareholders' Equity for the years ended January 31, 1998, February 1, 1997 and February 3, 1996. Combined Statements of Cash Flows for the years ended January 31, 1998, February 1, 1997 and February 3, 1996. Notes to Combined Financial Statements. B. Pro Forma Combined Financial Statements (See page 25) Unaudited Pro Forma Condensed Statement of Income for the year ended January 31, 1998 Unaudited Pro Forma Condensed Balance Sheet as of the year ended January 31, 1998 24 27 UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS The following unaudited pro forma condensed financial statements are based upon the financial statements of the Belk Companies, combined and adjusted to give effect to the Reorganization (see Notes to Combined Financial Statements, page 7). The unaudited pro forma condensed statement of income for the year ended January 31, 1998 gives effect to the Reorganization as if it had occurred at the beginning of the first period presented. The unaudited pro forma condensed balance sheet at January 31, 1998 gives effect to the Reorganization as if it had occurred on such date. These unaudited pro forma condensed financial statements should be read in conjunction with the audited historical combined financial statements including the notes thereto, included elsewhere herein. The unaudited pro forma condensed financial statements are not necessarily indicative of the results of operations or financial position of Belk, Inc. that would have occurred had the Reorganization occurred at the beginning of the first period presented or on the date indicated, nor are they necessarily indicative of the future operating results or financial position of Belk, Inc. The pro forma condensed financial statements reflect the preliminary allocation of the purchase price as the purchase price allocation has not been finalized. The unaudited pro forma adjustments are based upon certain assumptions included in the notes to the unaudited pro forma financial statements. Management believes that these assumptions are reasonable under the circumstances. The unaudited pro forma financial statements presented do not reflect future events that may occur after the Reorganization has been consummated. Management believes that operating expense synergies of the combined operations will be realized post-Reorganization. However, for the purposes of the unaudited pro forma financial statements presented herein, these synergies have not been reflected because their realization cannot be assured. The Reorganization is reflected in the unaudited pro forma condensed financial statements as a purchase business combination in accordance with the provisions of Accounting Principles Board Opinion Number 16, and the Commission's Staff Accounting Bulletin Number 97. Belk Enterprises, Inc., one of the combined Belk Companies, is deemed to be the acquiring corporation because its shareholders will receive a larger portion of the voting rights in the combined corporation than any other Belk company. The unaudited pro forma condensed financial statements include adjustments to reflect the acquisition of the Belk-Simpson retail operations (see Notes to Combined Financial Statements, page 7). Belk-Simpson is included in the historical financial statements of the Belk Companies as a 37% equity investment. The unaudited pro forma condensed financial statements reflect 100% of the Belk-Simpson retail operations and exclude the sold investment assets. 25 28 THE BELK COMPANIES UNAUDITED PRO FORMA CONDENSED STATEMENT OF INCOME YEAR ENDED JANUARY 31, 1998
THE BELK (1) COMPANIES HISTORICAL BELK-SIMPSON PRO FORMA PRO FORMA COMBINED ADJUSTMENTS ADJUSTMENTS BELK, INC. ---------- ------------ ----------- ----------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Revenues............................... $1,974,102 $ 68,164 $ -- $ 2,042,266 Cost of goods sold (including occupancy and buying expenses)................. 1,317,278 45,920 -- 1,363,198 Selling, general and administrative expenses............................. 543,245 19,483 (4,660)(2) 558,068 Impairment of long-lived assets........ 6,260 -- (2,912)(3) 3,348 ---------- -------- ------- ----------- Income from operations................. 107,319 2,761 7,572 117,652 Interest expense....................... (39,950) (563) (2,741)(4) (43,254) Interest income........................ 5,288 -- -- 5,288 Loss on sale of property and equipment............................ (1,058) (593) -- (1,651) Other income, net...................... 1,320 80 -- 1,400 ---------- -------- ------- ----------- Income from continuing operations before income taxes and equity in earnings of unconsolidated entities............................. 72,919 1,685 4,831 79,435 Income taxes........................... 29,900 512 1,362(5) 31,774 ---------- -------- ------- ----------- Income from continuing operations before equity in earnings of unconsolidated entities.............. 43,019 1,173 3,469 47,661 Equity in earnings of unconsolidated entities, net of income taxes........ 16,653 (16,653) -- -- ---------- -------- ------- ----------- Income from continuing operations...... $ 59,672 $(15,480) $ 3,469 $ 47,661 ========== ======== ======= =========== Income from continuing operations per share................................ $ 0.85 =========== Pro forma weighted average shares outstanding.......................... 56,005,817 ===========
26 29 THE BELK COMPANIES NOTES TO PRO FORMA CONDENSED STATEMENT OF INCOME (DOLLARS IN THOUSANDS)
PRO FORMA ADJUSTMENTS ----------- (1) Adjustments to reflect Belk-Simpson as if the retail operations of Belk-Simpson had been acquired by the Belk Companies on February 2, 1997. (2) Adjustments to selling, general and administrative expenses consist of the following: To record the pro forma increase in depreciation related to the allocation of fair market values to property and equipment, net, based on the estimated fair market value of the combined Belk Companies. The increase of $73,443 will be depreciated over the average remaining life of property and equipment, net, of 23 years................................................... $ 3,193 To record the pro forma decrease in amortization related to the allocation of fair market value to leasehold improvements based on the estimated fair market value of the combined Belk Companies. The decrease of $21,488 will be amortized over the average remaining life for leasehold improvements of 10 years................................................... (2,148) To record the pro forma net decrease in expense for the Company's defined benefit pension plan, defined benefit health care plan and Supplemental Executive Retirement Plan (the "Retirement Plans") related to adjusting the Retirement Plans to their estimated fair market values.................................................. (2,966) To record the decrease in amortization expense related to the elimination of intangible assets which were recorded in a previous purchase business combination. ........................................... (3,276) To record the amortization of Reorganization costs. ... 537 ------- ($4,660) ======= (3) To reverse impairment losses attributed to intangible assets which were recorded in a previous business combination. ........................................... ($2,912) ======= (4) Adjustments to interest expense consist of the following: To record the increase in interest expense related to the debt acquired to redeem shares from dissenting shareholders. The debt is estimated to be $51 million with an interest rate of 6.9%. ......................... ($3,519) To record amortization related to the allocation of fair market values to interest rate swap agreements. The interest rate swap agreements of $3,114 will be amortized over the average remaining life of 4 years. ................................................. 778 ------- ($2,741) ======= (5) Adjustment to reflect income taxes based upon the pro forma pre-tax income as if the Belk Companies had been subject to federal and state income taxes at an effective tax rate of 40%. ............................. $ 1,362 =======
27 30 THE BELK COMPANIES UNAUDITED PRO FORMA CONDENSED BALANCE SHEET AS OF JANUARY 31, 1998
THE BELK (1) COMPANIES HISTORICAL BELK-SIMPSON PRO FORMA PRO FORMA COMBINED ADJUSTMENTS ADJUSTMENTS BELK, INC. ---------- ------------ ----------- ---------- (DOLLARS IN THOUSANDS) Current Assets: Cash and cash equivalents............. $ 16,263 $ 91 $ -- $ 16,354 Accounts receivable, net.............. 353,509 12,835 -- 366,344 Merchandise inventory................. 431,169 14,935 -- 446,104 Other current assets.................. 39,117 (11,521) -- 27,596 ---------- -------- --------- ---------- Total current assets.......... 840,058 16,340 -- 856,398 Investments............................. 76,069 (38,846) -- 37,223 Property and equipment, net............. 395,771 21,684 50,841(2) 468,296 Other noncurrent assets................. 36,604 630 74,810(3) 112,044 ---------- -------- --------- ---------- Total assets.................. $1,348,502 $ (192) $ 125,651 $1,473,961 ========== ======== ========= ========== Current Liabilities: Accounts payable...................... $ 123,573 $ 3,248 $ 2,155(4) $ 128,976 Accrued expenses...................... 67,520 1,526 -- 69,046 Accrued income taxes.................. 3,363 (801) -- 2,562 Lines of credit and notes payable..... 59,323 892 -- 60,215 Current installments of long-term debt and capital lease obligations...... 89,133 400 -- 89,533 ---------- -------- --------- ---------- Total current liabilities..... 342,912 5,265 2,155 350,332 Deferred income taxes................... 28,866 -- 11,272(5) 40,138 Long-term debt and capital lease obligations, excluding current installments.......................... 210,449 1,500 51,000(6) 262,949 Deferred compensation and other non-current liabilities............... 50,508 (4,466) 23,350(7) 69,392 ---------- -------- --------- ---------- Total liabilities............. 632,735 2,299 87,777 722,811 Deferred income......................... 11,982 -- -- 11,982 Shareholders' Equity: Common stock.......................... 70,629 8,087 (78,156)(8) 560 Paid in capital....................... 470 -- 585,980(9) 586,450 Net unrealized gain (loss) on investments........................ 13,852 (147) (13,047)(10) 658 Retained earnings..................... 618,834 (10,431) (456,903)(11) 151,500 ---------- -------- --------- ---------- Total shareholders' equity.... $ 703,785 $ (2,491) $ 37,874 $ 739,168 ---------- -------- --------- ---------- $1,348,502 $ (192) $ 125,651 $1,473,961 ========== ======== ========= ==========
28 31 NOTES TO PRO FORMA CONDENSED BALANCE SHEET
PRO FORMA ADJUSTMENT ---------- (1) Adjustments to reflect Belk-Simpson as if the retail operations of Belk-Simpson had been acquired by the Belk Companies on January 31, 1998. (2) Amount represents the purchase price allocated to property and equipment, net, in excess of historical cost............ $ 50,841 ========= (3) Adjustments to other assets consist of the following: To eliminate intangible assets which were recorded in a previous purchase business combination...................... $ (16,926) Amount represents the estimated fair market value of the defined benefit pension plan net assets in excess of historical cost amounts..................................... 89,581 To record the anticipated costs incurred in connection with the Reorganization. The costs are estimated to be $5,373 of which $3,218 was paid and capitalized at January 31, 1998... 2,155 --------- $ 74,810 ========= (4) To record the anticipated costs incurred in connection with the Reorganization. The costs are estimated to be $5,373 of which $3,218 was paid and capitalized at January 31, 1998... $ 2,155 ========= (5) To adjust existing deferred taxes to the amounts that they are expected to be settled for or realized.................. $ (36,002) To record the deferred taxes related to the pro forma adjustments................................................. 47,274 --------- $ 11,272 ========= (6) To record the debt assumed to be incurred to redeem shares from dissenting shareholders................................ $ 51,000 ========= (7) Amount represents the estimated fair market value of the Retirement Plans liabilities in excess of historical amounts..................................................... $ 20,236 Amount represents the estimated fair market value of the interest rate swap agreement liabilities in excess of historical amounts.......................................... 3,114 --------- $ 23,350 ========= (8) Adjustments to record the pro forma shares outstanding...... $ (78,156) ========= (9) Net effect of purchase accounting adjustments............... $ 585,980 ========= (10) Adjustment to reduce the net unrealized gain or loss to the amount on the acquirer's records............................ $ (13,047) ========= (11) Adjustment to reduce the combined retained earnings to the amount on the acquirer's records............................ $(456,903) =========
29 32 2. Financial Statement Schedules Not applicable. 3. Exhibits (27.1) Financial Data Schedule is filed herein as an Exhibit. 30 33 SIGNATURES Pursuant to requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on the 8th day of June, 1998. BELK, INC. (Registrant) By: /s/ JOHN M. BELK ------------------------------------ John M. Belk Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Registrant and in the capacities indicated on June 8, 1998. /s/ JOHN M. BELK ------------------------------------------------------ John M. Belk Chairman of the Board and Chief Executive Officer (Principal Executive Officer) /s/ THOMAS M. BELK, JR. ------------------------------------------------------ Thomas M. Belk, Jr. President and Director /s/ H. W. MCKAY BELK ------------------------------------------------------ H. W. McKay Belk President and Director /s/ JOHN R. BELK ------------------------------------------------------ John R. Belk President and Director /s/ BILL R. WALTON ------------------------------------------------------ Bill R. Walton Senior Vice President, Controller and Treasurer (Principal Accounting Officer) /s/ J. KIRK GLENN, JR. ------------------------------------------------------ J. Kirk Glenn, Jr. Director /s/ KARL G. HUDSON, JR. ------------------------------------------------------ Karl G. Hudson, Jr. Director /s/ JOHN A. KUHNE ------------------------------------------------------ John A. Kuhne Director /s/ B. FRANK MATTHEWS, II ------------------------------------------------------ B. Frank Matthews, II Director 31 EX-27.1 2 FINANCIAL DATA SCHEDULE
5 1,000 YEAR JAN-31-1998 FEB-02-1997 JAN-31-1998 16,263 37,223 361,915 8,406 431,169 840,058 885,006 489,235 1,348,502 342,912 299,582 0 0 70,629 633,156 1,348,502 1,974,102 1,974,102 1,317,278 1,317,278 0 13,181 39,950 72,919 29,900 59,672 (5,272) 0 0 54,400 0 0 EPS IS NOT APPLICABLE AS THE 10-K IS FOR COMBINED COMPANIES UNDER COMMON CONTROL THAT WERE MERGED SUBSEQUENT TO YEAR END AS FURTHER EXPLAINED IN FOOTNOTE 1 OF THE NOTES TO THE COMBINED FINANCIAL STATEMENTS.
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