NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
NOTE 1: GENERAL
Saks Incorporated, a Tennessee corporation first incorporated in 1919, and its subsidiaries (collectively we, our, and
us) consist of Saks Fifth Avenue (SFA) stores and SFAs e-commerce operations (Saks Direct) as well as Saks Fifth Avenue OFF 5TH (OFF 5TH) stores.
Merger Agreement with Hudsons Bay Company
On
July 28, 2013, we entered into an Agreement and Plan of Merger (the Merger Agreement) with Hudsons Bay Company, a corporation incorporated under the federal laws of Canada (Hudsons Bay), and Harry Acquisition
Inc., a Delaware corporation and an indirect wholly owned subsidiary of Hudsons Bay (Merger Sub). The Merger Agreement provides, among other things and subject to the terms and conditions set forth therein, that Merger Sub will be
merged with and into us (the Merger), with us continuing as the surviving corporation and as an indirect wholly owned subsidiary of Hudsons Bay, and that, at the effective time of the Merger (the Effective Time), each
share of our common stock, par value $0.10 per share, outstanding immediately prior to the Effective Time (other than shares owned by us and our subsidiaries, Hudsons Bay or Merger Sub) will be automatically converted into the right to receive
$16.00 in cash, without interest (the Merger Consideration).
The closing of the Merger is subject to the approval of the Merger
Agreement by the affirmative vote of holders of at least a majority of all outstanding shares of our common stock (the Company Shareholder Approval). The closing of the Merger is also subject to various other customary conditions,
including the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the HSR condition), the absence of any governmental order prohibiting the consummation
of the transactions contemplated by the Merger Agreement, the accuracy of the representations and warranties contained in the Merger Agreement (subject to certain qualifications) and compliance with the covenants and agreements in the Merger
Agreement in all material respects. The closing of the Merger is not subject to a financing condition. On August 28, 2013, we were informed by the Federal Trade Commission that it had granted our request for early termination under the
Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended. Thus, the HSR condition has been satisfied.
Hudsons Bay has entered into
debt financing commitments and an equity investment agreement for the purpose of financing the transactions contemplated by the Merger Agreement and paying related fees and expenses. The obligations of the lenders to provide debt financing under the
debt commitments and the equity investors to provide equity financing under the equity investment agreement are subject to a number of conditions.
We have made customary representations, warranties and covenants in the Merger Agreement, including, among others, covenants to generally conduct our
business in the ordinary course prior to the closing of the Merger, covenants not to engage in certain types of transactions unless agreed to by Hudsons Bay, and covenants not to, subject to certain exceptions, withhold, withdraw or modify in
a manner adverse to Hudsons Bay the recommendation of our Board of Directors (the Board) that our shareholders approve the Merger Agreement.
The Merger Agreement contains a go-shop provision pursuant to which we have the right to solicit and engage in discussions and negotiations
with respect to competing transactions until 12:01 a.m. (New York time) on the 40th calendar day after the date of the Merger Agreement. For 20 calendar days after such date, we may continue discussions with any third party that made an alternative
acquisition proposal during such 40 calendar day period that the Board has determined is or could reasonably be expected to result in a superior proposal, as defined in the Merger Agreement, (an Excluded Party). After
this period, we are not permitted to solicit other proposals, but may share information and have discussions regarding unsolicited alternative proposals that meet certain conditions set forth in the Merger Agreement.
The Merger Agreement contains certain termination rights, including our right to terminate the Merger Agreement to accept a superior proposal, and
provides that, upon termination of the Merger Agreement by us or Hudsons Bay under specified conditions, a termination fee will be payable by us. In such circumstances, we will be required to pay Hudsons Bay a termination fee of $40,100
if such superior proposal is made by an Excluded Party and the termination occurs prior to the end of the 20 calendar day period described above, or in other circumstances $73,500. The termination fee of $73,500 is also payable by us under certain
other limited circumstances, including if Hudsons Bay terminates the Merger Agreement due to the Boards change of recommendation in favor of the Merger.
6
SAKS INCORPORATED & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
Upon termination of the Merger Agreement by us or Hudsons Bay under specified conditions relating to a breach or failure to close by Hudsons
Bay, Hudsons Bay will be required to pay us a termination fee of $173,800. In addition, subject to certain exceptions and limitations, either party may terminate the Merger Agreement if the Merger is not consummated by January 31, 2014,
which date will be extended to April 24, 2014 in the event that on January 31, 2014, all conditions to the closing of the Merger have been satisfied or waived, other than the antitrust approval condition described above.
Additional information about the Merger Agreement is set forth in our Current Report on Form 8-K filed with the SEC on July 29, 2013.
Basis of Presentation
The accompanying unaudited condensed
consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (GAAP) for interim financial information and in compliance with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair statement have been included. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Operating results for the three and six months ended August 3, 2013 are not necessarily indicative of the results that may be expected for the fiscal year ending February 1, 2014 (fiscal year 2013). The
financial statements include the accounts of Saks Incorporated and our subsidiaries. All intercompany amounts and transactions have been eliminated.
The accompanying Consolidated Balance Sheet as of February 2, 2013 has been derived from the audited financial statements at that date but does not
include all of the disclosures required by GAAP. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K
for the fiscal year ended February 2, 2013.
Net Sales
Net sales include sales of merchandise (net of returns and exclusive of sales taxes), commissions from leased departments, shipping and handling revenues
related to merchandise sold, and breakage income from unredeemed gift cards. Sales of merchandise shipped directly to customers from our retail stores and Saks Direct are recognized upon estimated receipt of merchandise by the customer. Sales of
merchandise at our retail stores are recognized at the time customers provide a satisfactory form of payment and take delivery of the merchandise. Commissions from leased departments are recognized at the time the merchandise is sold to customers.
Revenue associated with gift cards is recognized upon redemption of the card. We estimate the amount of goods that will be returned for a refund and reduce sales and gross margin by that amount.
Commissions from leased departments included in net sales were $12,526 and $24,699 for the three and six months ended August 3, 2013, respectively,
and $10,605 and $21,719 for the three and six months ended July 28, 2012, respectively. Leased department sales were $84,438 and $170,138 for the three and six months ended August 3, 2013, respectively, and $72,530 and $149,175 for the
three and six months ended July 28, 2012, respectively, and were excluded from net sales.
Cash and Cash Equivalents
Cash and cash equivalents primarily consist of cash on hand in the stores, deposits with banks, and investments with banks and financial institutions
that have original maturities of three months or less. Cash equivalents are stated at cost, which approximates fair value. Cash equivalents totaled $5,872, $76,561 and $134,718 as of August 3, 2013, February 2, 2013 and July 28,
2012, respectively, primarily consisting of money market funds and demand deposits. Income earned on cash equivalents was $3 and $42 for the three and six months ended August 3, 2013, respectively, and $140 and $330 for the three and six months
ended July 28, 2012, respectively, and was included in other income on the accompanying Consolidated Statements of Income.
7
SAKS INCORPORATED & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
Inventory
Merchandise inventories are stated at the lower of
cost or market and include freight, buying, and distribution costs. We take markdowns related to slow moving inventory, ensuring the appropriate inventory valuation. We receive vendor-provided support in different forms. When the vendor provides
support for inventory markdowns, we record the support as a reduction to cost of sales. Such support is recorded in the period that the corresponding markdowns are taken. When we receive inventory-related support that is not designated for
markdowns, we include this support as a reduction of the cost of purchases.
Impairments and Dispositions
Impairment and disposition costs include costs associated with store closures, including employee severance and lease termination fees, asset impairment
and disposal charges, and other store closure activities. Additionally, impairment and disposition costs include long-lived asset impairment charges related to assets held and used and losses related to asset dispositions made during the normal
course of business. We continuously evaluate our real estate portfolio and close underproductive stores in the normal course of business as leases expire or as other circumstances dictate.
During the three months ended August 3, 2013, we incurred store closing costs of $2,067, losses on asset dispositions in the normal course of
business of $308 and a gain on the sale of assets of $494. For the six months ended August 3, 2013, we incurred store closing costs of $5,999, losses on asset dispositions in the normal course of business of $308 and a gain on the sale of
assets of $626. During the three months ended July 28, 2012, we incurred asset impairment charges related to held and used assets of $4,292, store closing costs of $324 and losses on the disposal of assets during the normal course of business
of $64. For the six months ended July 28, 2012, we incurred the aforementioned asset impairment charges of $4,292, store closing costs of $634 and losses on the disposal of assets during the normal course of business of $64.
Segment Reporting
SFA, Saks Direct, and OFF 5TH have been
aggregated into one reportable segment based on the aggregation criteria outlined in the authoritative accounting literature.
Fair Value Measurements
The carrying value of our financial instruments, including cash and cash equivalents, receivables, accounts payable, and accrued expenses as of
August 3, 2013, February 2, 2013, and July 28, 2012 approximated their fair value due to the short-term nature of these financial instruments. See Note 5 for fair value disclosures related to our long-term debt.
Assets and liabilities that are measured at fair value on a non-recurring basis include our long-lived assets. During the three months ended
July 28, 2012, long-lived assets held and used with a carrying value of $4,856 were written down to their estimated fair value of $564, resulting in an impairment loss of $4,292, which is included in impairments and dispositions on the
Consolidated Statement of Income. The fair values of long-lived assets held and used were determined using an income-based approach and are classified as Level 3 within the fair value hierarchy. Significant inputs include projections of future
cash flows and discount rates. These inputs are based on assumptions from the perspective of market participants.
Operating Leases
We lease the land or the land and building at many of our stores, as well as our distribution centers, administrative facilities, and certain equipment.
Most of these leases are classified as operating leases. Most of our lease agreements include renewal periods at our option. Store lease agreements generally include rent holidays, rent escalation clauses, and contingent rent provisions that require
additional payments based on a percentage of sales in excess of specified levels. Contingent rental payments are recognized when we determine that it is probable that the specified levels will be reached during the fiscal year. For leases that
contain rent holiday periods and scheduled rent increases, we recognize rent expense on a straight-line basis over the lease term from the date we take possession of the leased property. The difference between the straight-line rent amounts and
amounts payable under the lease agreements are recorded as deferred rent. Tenant improvement allowances and other lease incentives are recorded as deferred rent liabilities and are recognized on a straightline basis over the life of the lease.
As of August 3, 2013, February 2, 2013, and July 28, 2012 deferred rent liabilities were $111,642, $78,671, and $77,726, respectively. These amounts are included in other long-term liabilities on the Consolidated Balance Sheets.
8
SAKS INCORPORATED & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
Gift Cards
We sell gift cards with no expiration dates. At
the time gift cards are sold, no revenue is recognized and a liability is established for the value of the card. The liability is relieved and revenue is recognized when the gift cards are redeemed by the customer for merchandise. The liability for
unredeemed gift cards was $27,595, $29,781, and $25,161 as of August 3, 2013, February 2, 2013, and July 28, 2012, respectively and is included in accrued expenses on the Consolidated Balance Sheets.
NOTE 2: RECENT ACCOUNTING PRONOUNCEMENTS
Recently Adopted Accounting
Pronouncements
In February 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update
No. 2013-02,
Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income
(ASU 2013-02). ASU 2013-02 requires entities to provide information about the amounts reclassified out of accumulated other
comprehensive income by component. In addition, entities are required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by
the respective line items of net income but only if the amount reclassified is required to be reclassified to net income in its entirety in the same reporting period. For amounts not required to be reclassified in their entirety to net income,
entities are required to cross-reference to other disclosures under U.S. GAAP that provide additional detail about those amounts. Effective February 3, 2013, we adopted ASU 2013-02. The adoption did not affect our consolidated financial
position, results of operations, or cash flows.
Recently Issued Accounting Pronouncements
In July 2013, the FASB issued Accounting Standards Update No. 2013-11,
Presentation of an Unrecognized Tax Benefit When a Net Operating Loss
Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists
(ASU 2013-11). ASU 2013-11 requires an unrecognized tax benefit, or a portion of an unrecognized tax benefit, be presented in the financial statements as a
reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the
reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the
entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The assessment of whether a
deferred tax asset is available should be made presuming disallowance of the tax position at the reporting date. ASU 2013-11 is effective for reporting periods beginning after December 15, 2013, with early adoption permitted. The adoption of
ASU 2013-11 will not affect our consolidated financial position, results of operations, or cash flows.
In February 2013, the FASB issued Accounting
Standards Update No. 2013-04,
Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date
(ASU 2013-04).
ASU 2013-04
requires entities to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date as the sum of the
amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its
co-obligors.
ASU 2013-04 also
requires entities to disclose the nature and amount of the obligation as well as other information about the obligations. ASU 2013-04 is effective for reporting periods beginning after December 15, 2013. We are currently evaluating the
potential impact, if any, ASU 2013-04 may have on our financial position, results of operations, or cash flows.
NOTE 3: INCOME TAXES
The effective income tax rates for the three- and six-month periods ended August 3, 2013 were 48.6% and 112.3%, respectively, as compared to 46.0%
and 40.8% for the three- and six-month periods ended July 28, 2012, respectively. The increase in the effective tax rate for the three-month period ended August 3, 2013 was primarily due to the release of a valuation allowance on state net
operating loss carryforwards, increasing the expected benefit of the pre-tax loss. The increase in the effective tax rate for the six months ended August 3, 2013 was primarily due to the release of a valuation allowance on state net operating
loss carryforwards and the reversal of a reserve for an uncertain tax position.
9
SAKS INCORPORATED & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
The following table shows a reconciliation of our income tax expense (benefit) for the three and six months ended August 3, 2013 and July 28,
2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
August 3,
2013
|
|
|
July 28,
2012
|
|
|
August 3,
2013
|
|
|
July 28,
2012
|
|
Expected federal income taxes at statutory rate of 35%
|
|
$
|
(13,330)
|
|
|
$
|
(7,975)
|
|
|
$
|
(1,185)
|
|
|
$
|
11,734
|
|
State and local income taxes, net of federal benefit
|
|
|
(3,588)
|
|
|
|
(1,763)
|
|
|
|
(1,067)
|
|
|
|
2,263
|
|
Valuation allowance adjustment related to state net operating losses
|
|
|
(829)
|
|
|
|
(160)
|
|
|
|
(829)
|
|
|
|
(625)
|
|
Effect of tax reserve adjustments
|
|
|
(1,025)
|
|
|
|
(898)
|
|
|
|
(1,272)
|
|
|
|
(1,283)
|
|
Non-deductible compensation
|
|
|
532
|
|
|
|
|
|
|
|
532
|
|
|
|
1,152
|
|
Other, net
|
|
|
(267)
|
|
|
|
308
|
|
|
|
19
|
|
|
|
438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
$
|
(18,507)
|
|
|
$
|
(10,488)
|
|
|
$
|
(3,802)
|
|
|
$
|
13,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We file a consolidated U.S. federal income tax return as well as state tax returns in multiple state jurisdictions. We
have completed examinations by the Internal Revenue Service or the statute of limitations has expired for taxable years through January 31, 2009. With respect to state and local jurisdictions, we have completed examinations in many
jurisdictions through the same period and beyond and currently have examinations in progress for several jurisdictions.
As of August 3, 2013,
gross deferred tax assets related to U.S. federal and state net operating loss, alternative minimum tax credit and other federal tax credit carryforwards were $86,832. The majority of the net operating loss carryforward is a result of the net
operating losses incurred during the fiscal years ended January 30, 2010 and January 31, 2009 principally due to difficult market and macroeconomic conditions. We have concluded, based on the weight of all available positive and negative
evidence, that all but $14,500 of these tax benefits relating to certain state losses are more likely than not to be realized in the future. Therefore, the valuation allowance as of August 3, 2013 was $14,500. We evaluate the realizability of
our deferred tax assets on a quarterly basis and will continue to assess the need for a valuation allowance in the future. If future results are less than or more than projected or tax planning strategies are no longer viable, then changes to
valuation allowances may be required which could have a material impact on our results of operations in the period in which they are recorded.
NOTE 4: EARNINGS
(LOSS) PER SHARE
Basic earnings (loss) per share (EPS) is computed by dividing income available to common shareholders by the
weighted-average number of common shares outstanding during the period. Diluted EPS is computed by adjusting: (i) the income available to common shareholders for the amount of interest expense recognized related to the convertible notes, and
(ii) the weighted-average number of common shares outstanding to assume conversion of our convertible notes and the issuance of all other potential common shares, if the effect is dilutive. The following table sets forth the computations of
basic and diluted EPS for the three and six months ended August 3, 2013 and July 28, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
August 3, 2013
|
|
|
July 28, 2012
|
|
|
|
Net
Loss
|
|
|
Shares
|
|
|
Per
Share
Amount
|
|
|
Net
Loss
|
|
|
Shares
|
|
|
Per
Share
Amount
|
|
Basic EPS
|
|
$
|
(19,580)
|
|
|
|
145,504
|
|
|
$
|
(0.13)
|
|
|
$
|
(12,297)
|
|
|
|
151,231
|
|
|
$
|
(0.08)
|
|
Effect of dilutive potential common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
$
|
(19,580)
|
|
|
|
145,504
|
|
|
$
|
(0.13)
|
|
|
$
|
(12,297)
|
|
|
|
151,231
|
|
|
$
|
(0.08)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
SAKS INCORPORATED & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
August 3, 2013
|
|
|
July 28, 2012
|
|
|
|
Net
Income
|
|
|
Shares
|
|
|
Per
Share
Amount
|
|
|
Net
Income
|
|
|
Shares
|
|
|
Per
Share
Amount
|
|
Basic EPS
|
|
$
|
415
|
|
|
|
145,334
|
|
|
$
|
0.00
|
|
|
$
|
19,848
|
|
|
|
152,955
|
|
|
$
|
0.13
|
|
Effect of dilutive potential common shares
|
|
|
|
|
|
|
2,321
|
|
|
|
|
|
|
|
|
|
|
|
2,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
$
|
415
|
|
|
|
147,655
|
|
|
$
|
0.00
|
|
|
$
|
19,848
|
|
|
|
155,936
|
|
|
$
|
0.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three and six months ended August 3, 2013, the computation of diluted EPS assumes that our 7.5% convertible
notes would be settled in shares of common stock for the entire period. For the six months ended August 3, 2013, the computation of diluted EPS assumes that our 2.0% convertible notes would be settled in shares of common stock through
March 15, 2013, the date we announced the redemption of our 2.0% convertible notes, and that we would have settled any conversions in cash. For the three and six months ended July 28, 2012, the computations of diluted EPS assume that both
our 2.0% and 7.5% convertible notes would be settled in shares of common stock for the entire period.
The following table presents potentially dilutive securities
excluded from the computations of diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
August 3,
2013
|
|
|
July 28,
2012
|
|
|
August 3,
2013
|
|
|
July 28,
2012
|
|
Stock options
1
|
|
|
1,397
|
2
|
|
|
1,591
|
2
|
|
|
495
|
4
|
|
|
1,258
|
4
|
Restricted stock and performance share awards
1
|
|
|
4,714
|
2
|
|
|
5,183
|
2
|
|
|
421
|
3
|
|
|
|
|
Contingently convertible securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.5% Convertible Notes
|
|
|
16,470
|
2
|
|
|
21,670
|
2
|
|
|
16,470
|
5
|
|
|
21,670
|
5
|
2.0% Convertible Notes
|
|
|
n/a
|
|
|
|
19,219
|
2
|
|
|
4,330
|
5
|
|
|
19,219
|
5
|
(1)
|
The amounts represent the number of instruments outstanding at the end of the period. Application of the treasury stock method would reduce this amount if
they had a dilutive effect and were included in the computation of diluted EPS.
|
(2)
|
Potentially dilutive securities excluded from the computation of diluted EPS because the effect would have been anti-dilutive since we recognized a net
loss for the period.
|
(3)
|
Potentially dilutive securities excluded from the computation of diluted EPS because the performance criteria were not met, assuming that the end of the
period was the end of the contingency period.
|
(4)
|
Potentially dilutive securities excluded from the computation of diluted EPS because the exercise price of the stock options exceeded the average market
price of our common stock during the period.
|
(5)
|
Potentially dilutive securities excluded from the computation of diluted EPS because the effect would have been anti-dilutive.
|
11
SAKS INCORPORATED & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
NOTE 5: DEBT
The following table presents our long-term debt and capital
lease obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 3,
2013
|
|
|
February 2,
2013
|
|
|
July 28,
2012
|
|
Notes 7.00%, maturing fiscal year 2013
|
|
$
|
2,125
|
|
|
$
|
2,125
|
|
|
$
|
2,125
|
|
Convertible notes 7.5%, maturing fiscal year 2013, net
1
|
|
|
89,634
|
|
|
|
87,374
|
|
|
|
112,170
|
|
Convertible notes 2.0%, maturing fiscal year 2024, net
2
|
|
|
|
|
|
|
219,551
|
|
|
|
215,129
|
|
Revolving credit facility
|
|
|
200,000
|
|
|
|
|
|
|
|
|
|
Capital lease obligations
|
|
|
49,890
|
|
|
|
50,542
|
|
|
|
53,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
341,649
|
|
|
|
359,592
|
|
|
|
383,253
|
|
Less current portion:
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes 7.00%, maturing fiscal year 2013
|
|
|
(2,125)
|
|
|
|
(2,125)
|
|
|
|
|
|
Convertible notes 7.50%, maturing fiscal year 2013, net
1
|
|
|
(89,634)
|
|
|
|
(87,374)
|
|
|
|
|
|
Capital lease obligations
|
|
|
(10,290)
|
|
|
|
(9,490)
|
|
|
|
(8,905)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
|
(102,049)
|
|
|
|
(98,989)
|
|
|
|
(8,905)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
239,600
|
|
|
$
|
260,603
|
|
|
$
|
374,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Amounts represent the outstanding principal, net of the unamortized discount of $1,570, $3,830, and $7,830 as of August 3, 2013, February 2,
2013, and July 28, 2012, respectively.
|
(2)
|
Amounts represent the outstanding principal, net of the unamortized discount of $10,449 and $14,871 as of February 2, 2013 and July 28, 2012,
respectively.
|
The estimated fair value of our outstanding debt instruments, including the conversion feature of our
convertible debt instruments, as of August 3, 2013, February 2, 2013, and July 28, 2012 was $467,961, $400,988, and $480,200, respectively. They are classified as Level 2 within the fair value hierarchy and were determined based
on recently reported market transactions for the identical liability when traded as an asset or pricing information obtained from a third-party financial institution. The inputs and assumptions used in the pricing models of the financial institution
are primarily derived from market-observable sources. The carrying value of borrowings under our revolving credit facility approximates fair value.
Revolving
Credit Facility
In March 2013, we entered into an amendment to our existing revolving credit agreement. The amendment increased the maximum
borrowing capacity of the facility from $500,000 to $600,000, subject to a borrowing base equal to a specified percentage of eligible inventory and certain credit card receivables. The availability is based primarily on current levels of inventory,
less outstanding letters of credit. The amendment also extended the maturity date of the facility from March 29, 2016 to March 28, 2018 and revised certain terms of the existing revolving credit facility, including the interest rates and
unused line fees. Costs incurred in connection with the amendment to the revolving credit agreement were $1,683. As of August 3, 2013, we had $200,000 of outstanding borrowings under the facility and had letters of credit outstanding of $6,137.
The obligations under the facility are guaranteed by certain of our existing and future domestic subsidiaries, and are secured by their merchandise
inventories and certain third party receivables. Under the amended terms of the revolving credit agreement, borrowings under the facility bear interest at a per annum rate of either: (i) LIBOR plus a percentage ranging from 1.50% to 2.00%, or
(ii) the higher of the prime rate or the federal funds rate plus a percentage ranging from 0.50% to 1.00%. Letters of credit are charged a per annum fee equal to the then applicable LIBOR borrowing spread (for standby letters of credit) or the
applicable LIBOR spread minus 0.50% (for documentary or commercial letters of credit). We also pay an unused line fee ranging from 0.25% to 0.38% per annum on the average daily unused balance of the facility.
During periods in which availability under the agreement is $75,000 or more, we are not subject to financial covenants. If and when availability under
the agreement decreases to less than $75,000, we will be subject to a minimum fixed charge coverage ratio of 1.0 to 1.0. There are no debt-ratings-based provisions. As of August 3, 2013, we were not subject to the minimum fixed charge coverage
ratio. The credit agreement contains default provisions that are typical for this type of financing, including a
12
SAKS INCORPORATED & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
provision that would trigger a default under the credit agreement if a default were to occur in another debt instrument resulting in the acceleration of more than $20,000 of principal under that
other instrument.
The revolving credit agreement permits additional debt in specific categories including the following (each category being
subject to limitations as described in the revolving credit agreement): (i) debt arising from permitted sale/leaseback transactions; (ii) debt to finance purchases of machinery, equipment, real estate and other fixed assets;
(iii) debt in connection with permitted acquisitions; and (iv) unsecured debt. The revolving credit agreement also permits other debt (including permitted sale/leaseback transactions) in an aggregate amount not to exceed $500,000 at any
time, including secured debt, so long as it is a permitted lien as defined by the revolving credit agreement. The revolving credit agreement also places certain restrictions on, among other things, asset sales, the ability to make acquisitions and
investments, and to pay dividends.
Senior Notes
As of
August 3, 2013, we had $2,125 of unsecured senior notes outstanding that mature on December 1, 2013 with an interest rate of 7.0%. The senior notes are guaranteed by all of the subsidiaries that guarantee our revolving credit facility. The
notes permit certain sale/leaseback transactions but place certain restrictions around the use of proceeds generated from a sale/leaseback transaction. The terms of the senior notes require all principal to be repaid at maturity. There are no
financial covenants associated with these notes, and there are no debt-ratings-based provisions.
Convertible Notes
7.5% Convertible Notes
We issued $120,000 of 7.5%
convertible notes in May 2009 (the 7.5% Convertible Notes). The 7.5% Convertible Notes mature on December 1, 2013 and are convertible, at the option of the holders at any time, into shares of our common stock at a conversion rate of
180.5869 shares per one thousand dollars in principal amount of notes, which is equivalent to a conversion price of $5.54 per share (21,670 shares of common stock to be issued upon conversion of the original principal amount). The conversion rate is
subject to adjustment for certain events, including but not limited to the issuance of stock dividends on our common stock; the issuance of rights or warrants; subdivisions, combinations, distributions of capital stock, indebtedness or assets; cash
dividends; and certain issuer tender or exchange offers. We can settle a conversion of the notes with shares, cash, or a combination thereof at our discretion.
The consummation of the pending Merger with Hudsons Bay would constitute a make whole adjustment event as defined in the indenture
agreement. Should the Merger close prior to the maturity date of the 7.5% Convertible Notes, the conversion rate would be increased in accordance with the terms of the indenture agreement. We would accordingly settle any notes converted in
connection with the make whole adjustment event in cash in an amount equal to the adjusted conversion rate multiplied by the Merger Consideration.
Authoritative accounting literature requires the allocation of convertible debt proceeds between the liability component and the embedded conversion
option (i.e., the equity component). The liability component of the debt instrument is accreted to par value using the effective interest method over the remaining life of the debt. The accretion is reported as a component of interest expense. The
equity component is not subsequently revalued as long as it continues to qualify for equity treatment. Upon issuance, we estimated the fair value of the liability component of the 7.5% Convertible Notes, assuming a 13.0% non-convertible borrowing
rate, to be $97,994. The difference between the fair value and the principal amount of the 7.5% Convertible Notes was $22,006. This amount was recorded as a debt discount and as an increase to additional paid-in capital as of the issuance date. The
discount is being accreted to interest expense over the 4.5 year period to the maturity date of the notes on December 1, 2013 resulting in an increase in non-cash interest expense.
During the year ended February 2, 2013, holders of our 7.5% Convertible Notes converted $28,796 principal amount of notes into 5,200 shares of
common stock. As of August 3, 2013, $91,204 principal amount of convertible notes was outstanding of the original $120,000 issued.
13
SAKS INCORPORATED & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
2.0% Convertible Senior Notes
In March 2004, we issued
$230,000 of 2.0% convertible senior notes set to mature in 2024 (the 2.0% Convertible Notes). In certain circumstances, the 2.0% Convertible Notes allowed the holders to convert the notes to shares of our common stock at a conversion
rate of 83.5609 per one thousand dollars in principal amount of notes, which is equivalent to a conversion price of $11.97 per share (19,219 shares of common stock to be issued upon conversion of the original principal amount) subject to an
anti-dilution adjustment.
We estimated the fair value of the liability component of the 2.0% Convertible Notes at the issuance date, assuming a
6.25% non-convertible borrowing rate, to be $158,148. The difference between the fair value and the principal amount of the 2.0% Convertible Notes was $71,852. This amount was recorded as a debt discount and as an increase to additional paid-in
capital as of the issuance date. In accordance with the authoritative accounting guidance, we amortized the debt discount over the expected life of a similar liability that does not have an associated equity component (considering the effects of
embedded features other than the conversion option). Since the holders of the notes had put options in 2014 and 2019, the debt instrument was being accreted to par value using the effective interest method from issuance until the first put date in
2014.
In April 2013, we completed the redemption of our 2.0% Convertible Notes. An aggregate principal amount of $212,325 of our 2.0% Convertible
Notes was tendered at a redemption price equal to 100.2% of the principal amount of the notes, plus accrued and unpaid interest through the redemption date. The entire amount of cash disbursed in connection with the redemption of our 2.0%
Convertible Notes, including $66,755 related to the original issuance discount discussed above and the 0.2% call premium, was classified as payments of long-term debt in financing activities on the accompanying Consolidated Statements of Cash
Flows. Holders of the remaining $17,675 principal amount of notes opted to convert their notes. We satisfied our obligation for these converted notes on May 17, 2013 by delivering cash to the holders based on a share price of $11.53, the
average closing share price for the 20 business days from April 17, 2013 to May 14, 2013, in accordance with the indenture agreement. We recognized a loss on extinguishment of debt of $13,012 relating to the redemption and conversion of
the 2.0% Convertible Notes.
Saks Incorporated is the issuer of our outstanding notes, which include the 7.0% senior notes and the 7.5% Convertible
Notes. Substantially all of Saks Incorporateds subsidiaries guarantee our outstanding notes which are the same subsidiaries that guarantee the revolving credit facility. Separate condensed consolidating financial information is not included
because Saks Incorporated has no independent assets or operations, the subsidiary guarantees related to the notes are full and unconditional and joint and several, and subsidiaries not guaranteeing the debt are minor. All subsidiaries of Saks
Incorporated are 100% owned and there are no contractual restrictions on the ability of Saks Incorporated to obtain funds from our subsidiaries.
14
SAKS INCORPORATED & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
NOTE 6: EMPLOYEE BENEFIT PLANS
We sponsor a funded
defined-benefit cash balance pension plan (Pension Plan) and an unfunded supplemental executive retirement plan (SERP) for certain employees. Effective January 1, 2007, we amended the Pension Plan, suspending future
benefit accruals for all participants, except certain participants who as of December 31, 2006 had attained age 55, completed 10 years of vesting service, and who are not considered to be highly compensated employees. Effective
March 13, 2009, we amended the Pension Plan, suspending future benefit accruals for all remaining participants. We fund the Pension Plan in accordance with regulatory funding requirements. The following table presents the components of net
periodic benefit cost related to the Pension Plan and SERP for the three and six months ended August 3, 2013 and July 28, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
August 3,
2013
|
|
|
July 28,
2012
|
|
|
August 3,
2013
|
|
|
July 28,
2012
|
|
Interest cost
|
|
$
|
1,396
|
|
|
$
|
1,311
|
|
|
$
|
2,600
|
|
|
$
|
2,620
|
|
Expected return on plan assets
|
|
|
(2,169)
|
|
|
|
(1,758)
|
|
|
|
(3,882)
|
|
|
|
(3,481)
|
|
Amortization of net loss
|
|
|
687
|
|
|
|
689
|
|
|
|
1,360
|
|
|
|
1,415
|
|
Settlement loss recognized
|
|
|
2,725
|
|
|
|
|
|
|
|
2,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
2,639
|
|
|
$
|
242
|
|
|
$
|
2,803
|
|
|
$
|
554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We contributed $311 and $1,398 to the Pension Plan and SERP during the three and six months ended August 3, 2013,
respectively, and expect additional funding requirements of approximately $1,075 for the remainder of fiscal year 2013.
NOTE 7: SHAREHOLDERS EQUITY
The following table summarizes the changes in shareholders equity for the six months ended August 3, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Additional
Paid-In
Capital
|
|
|
Retained
Earnings
|
|
|
Accumulated
Other
Comprehensive
Loss¹
|
|
|
Total
Shareholders
Equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
|
|
|
Balance at February 2, 2013
|
|
|
149,660
|
|
|
$
|
14,966
|
|
|
$
|
1,172,581
|
|
|
$
|
12,176
|
|
|
$
|
(49,874)
|
|
|
$
|
1,149,849
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
415
|
|
|
|
|
|
|
|
415
|
|
Other comprehensive income, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,467
|
|
|
|
2,467
|
|
Stock options exercised
|
|
|
15
|
|
|
|
2
|
|
|
|
131
|
|
|
|
|
|
|
|
|
|
|
|
133
|
|
Net activity under stock compensation plans
|
|
|
1,298
|
|
|
|
130
|
|
|
|
(130)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares withheld for employee taxes
|
|
|
(767)
|
|
|
|
(77)
|
|
|
|
(8,390)
|
|
|
|
|
|
|
|
|
|
|
|
(8,467)
|
|
Income tax effect of stock compensation plans
|
|
|
|
|
|
|
|
|
|
|
1,497
|
|
|
|
|
|
|
|
|
|
|
|
1,497
|
|
Deferred tax adjustment related to stock compensation plans
|
|
|
|
|
|
|
|
|
|
|
(2,503)
|
|
|
|
|
|
|
|
|
|
|
|
(2,503)
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
9,084
|
|
|
|
|
|
|
|
|
|
|
|
9,084
|
|
Repurchase of common stock
|
|
|
(24)
|
|
|
|
(2)
|
|
|
|
(252)
|
|
|
|
|
|
|
|
|
|
|
|
(254)
|
|
Deferred tax adjustment related to convertible notes
|
|
|
|
|
|
|
|
|
|
|
(1,196)
|
|
|
|
|
|
|
|
|
|
|
|
(1,196)
|
|
Redemption of 2.0% convertible notes
|
|
|
|
|
|
|
|
|
|
|
4,079
|
|
|
|
|
|
|
|
|
|
|
|
4,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at August 3, 2013
|
|
|
150,182
|
|
|
$
|
15,019
|
|
|
$
|
1,174,901
|
|
|
$
|
12,591
|
|
|
$
|
(47,407)
|
|
|
$
|
1,155,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Accumulated Other Comprehensive Loss is composed of net gains and losses associated with our defined benefit plans. These net gains and losses are included
in the computation of net periodic benefit cost. See Note 6 for additional details.
|
15
SAKS INCORPORATED & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
We have a share repurchase program that authorizes us to repurchase up to 70,025 shares of our common stock. During the six months ended August 3,
2013, we repurchased and retired an aggregate of 24 shares of our common stock at an average price of $10.52 and a total cost of $254. During the six months ended July 28, 2012, we repurchased and retired an aggregate of 7,978 shares of
our common stock at an average price of $9.90 and a total cost of $79,006. As of August 3, 2013, there were 12,626 shares remaining available for repurchase under our share repurchase program.
NOTE 8: STOCK-BASED COMPENSATION
We maintain an equity
incentive plan, which allows for the granting of stock options, stock appreciation rights, restricted stock, performance share awards and other forms of equity awards to our employees, directors, and officers. Stock options generally vest over a
four-year period from the grant date and have a contractual term of seven to ten years from the grant date. Restricted stock and performance share awards generally vest over periods ranging from three to five years from the grant date, although the
equity incentive plan permits accelerated vesting in certain circumstances at the discretion of the Human Resources and Compensation Committee of the Board of Directors. We do not use cash to settle any of our stock-based awards and we issue
new shares of common stock upon the exercise of stock options and the granting of restricted stock and performance shares.
We recognize
compensation expense for stock options with graded-vesting on a straight-line basis over the requisite service period. Compensation expense for restricted stock and performance share awards that cliff-vest is recognized on a straight-line basis over
the requisite service period. Restricted stock awards with graded-vesting are treated as multiple awards based upon the vesting date. We recognize compensation expense for these awards on a straight-line basis over the requisite service period for
each separately vesting portion of the award.
Total pre-tax stock-based compensation expense for the three and six months ended August 3, 2013
was $4,093 and $9,084, respectively, and $3,999 and $8,390 for the three and six months ended July 28, 2012, respectively.
Upon consummation
of the pending Merger with Hudsons Bay, (1) each stock option that is outstanding immediately prior to the Effective Time will become fully vested and be converted into the right to receive an amount in cash equal to the Merger
Consideration, multiplied by the number of shares underlying the option, net of the aggregate exercise price, (2) each share of restricted stock granted subject to vesting or other lapse restrictions will become fully vested and be converted
into the right to receive an amount in cash equal to the Merger Consideration, and (3) each award of performance shares will become fully vested and be converted into the right to receive an amount in cash equal to the Merger Consideration
multiplied by the number of shares subject to the award, which number is determined based on actual performance for completed performance periods and target performance for incomplete performance periods. Pursuant to the Merger Agreement, we may not
grant any additional equity-based awards.
NOTE 9: COMMITMENTS AND CONTINGENCIES
Legal
On February 2, 2011, the plaintiffs in
Dawn
Till and Mary Josephs v. Saks Incorporated et al.,
filed a complaint, with which we were served on March 10, 2011, in a purported class and collective action in the U.S. District Court for the Northern District of California. The complaint
alleges that the plaintiffs were improperly classified as exempt from the overtime pay requirements of the Fair Labor Standards Act (FLSA) and the California Labor Code and that we failed to pay overtime, provide itemized wage statements
and provide meal and rest periods. On March 8, 2011, the plaintiffs filed an amended complaint adding a claim for penalties under the California Private Attorneys General Act of 2004. The plaintiffs seek to proceed collectively under the FLSA
and as a class under the California statutes on behalf of individuals who have been employed by OFF 5TH as Selling and Service Managers, Merchandise Team Managers, or Department Managers and similar titles. On February 8, 2012, the same
plaintiffs counsel from the
Till
case filed a complaint, with which we were served on March 2, 2012, in the U.S. District Court for the Southern District of New York, alleging essentially the same FLSA claim and related claims
under New York state law
(Tate Small et al. v. Saks Incorporated et al.)
This case was subsequently transferred to the U.S. District Court for the Northern District
16
SAKS INCORPORATED & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
of California. We believe that our managers at OFF 5TH have been properly classified as exempt under both federal and state law and we intend to defend these lawsuits vigorously. It is not
possible to predict whether the courts will permit these actions to proceed collectively or as a class. We cannot reasonably estimate the possible loss or range of loss, if any, that may arise from these matters.
Following the announcement of the execution of the Merger Agreement on July 29, 2013, seven putative class action lawsuits challenging the proposed
acquisition were filed in the Supreme Court of the State of New York, New York County: Cohen v. Saks Inc. et al., Index No. 652724/2013, filed August 2, 2013; Jennings v. Arredondo et al., Index No. 652725/2013, filed August 2, 2013;
Oliver v. Saks Inc. et al., Index No. 652758/2013, filed August 6, 2013; Teitelbaum v. Arredondo et al., Index No. 652793/2013, filed August 8, 2013; Sabattini v. Saks Inc. et al., Index No. 652817/2013, filed August 9, 2013; Oliver
v. Saks Inc. et al., Index No. 652854/2013, filed August 14, 2013; and Golding v. Arredondo et al., Index No. 653036/2013, filed August 30, 2013. Two additional lawsuits were filed in Tennessee: Golding v. Saks Inc., Case
No. 13-1127-II, was filed on August 9, 2013 in the Chancery Court for Davidson County, Tennessee, and Firemens Retirement System of St. Louis v. Saks Inc., et al., Case No. 13-C3299, was filed on August 15, 2013 in the
Circuit Court for Davidson County, Tennessee. On August 12, 2013, the plaintiff in the Golding case in Tennessee filed a notice of voluntary dismissal. The complaints in the foregoing lawsuits allege that our directors breached their fiduciary
duties to our shareholders in connection with the Merger Agreement by agreeing to sell the company for inadequate merger consideration and by agreeing to terms in the Merger Agreement that discourage competing bidders. The complaints also allege
that Hudsons Bay aided and abetted the directors breach of their fiduciary duties. These lawsuits seek, among other relief, an injunction barring the Merger and damages. The outcome of these lawsuits is uncertain. An adverse monetary
judgment could have a material adverse effect on our operations and liquidity, a preliminary injunction could delay or jeopardize the completion of the Merger, and an adverse judgment granting permanent injunctive relief could indefinitely enjoin
completion of the Merger. We believe these lawsuits are meritless.
In addition to the litigation described in the preceding paragraphs, we are
involved in legal proceedings arising from our normal business activities and have accruals for losses where appropriate. Management believes that none of these legal proceedings will have a material adverse effect on our consolidated financial
position, results of operations, or liquidity.
Taxes
We
are routinely under examination by federal, state or local taxing authorities in the areas of income taxes and the remittance of sales and use taxes. These examinations include questioning the timing and amount of deductions, the allocation of
income among various tax jurisdictions and compliance with federal, state and local tax laws. Based on annual evaluations of our tax filing positions, we believe we have adequately accrued for our tax exposures. To the extent we are to prevail in
matters for which accruals have been established or are required to pay amounts in excess of income tax reserves, our effective tax rate in a given financial statement period may be materially impacted. As of August 3, 2013, certain state
income and sales and use tax examinations were ongoing. On February 27, 2013, we received a proposed assessment of $20,493 for sales and use tax from the New York State Department of Taxation and Finance (Department) for the audit
period September 1, 2003 through August 31, 2009. The assessment relates to the issue of affiliated nexus and the Department contends that all of our legal entities which ship items into New York should have collected tax on such
shipments. We disagree with the Departments position on this issue and will vigorously defend the assessment based upon the technical merits of the nexus law. We have not established any accruals for this matter for the time period covered by
the audit. We cannot reasonably estimate the possible loss or range of loss, if any, that may arise from this matter.
Other Matters
From time to time we have issued guarantees to landlords under leases of stores operated by our subsidiaries. Certain of these stores were sold in
connection with the Saks Department Store Group and the Northern Department Store Group transactions which occurred in July 2005 and March 2006, respectively. If the purchasers fail to perform certain obligations under the leases we guaranteed, we
could have obligations to landlords under such guarantees. Based on the information currently available, we do not believe that our potential obligations under these lease guarantees would be material.
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