UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarter ended July 1, 2000
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 0-16126
SPIEGEL, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-2593917
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3500 Lacey Road, Downers Grove, Illinois 60515-5432
(Address of principal executive offices) (Zip Code)
630-986-8800
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
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 [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares outstanding of each of the issuer's classes of common
stock, as of August 11, 2000 are as follows:
Class A non-voting common stock, $1.00 par value
14,854,244 shares
Class B voting common stock, $1.00 par value
117,009,869 shares
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SPIEGEL, INC. AND SUBSIDIARIES
Index to Quarterly Report on Form 10-Q
Thirteen and Twenty-six Weeks Ended July 1, 2000
PAGE
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets,
July 1, 2000, July 3, 1999 and January 1, 2000 3
Consolidated Statements of Earnings,
Thirteen and Twenty-six Weeks Ended
July 1, 2000 and July 3, 1999 4
Consolidated Statements of Cash Flows,
Twenty-six Weeks Ended July 1, 2000 and July 3, 1999 5
Notes to Consolidated Financial Statements 6-8
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-16
Item 3 - Quantitative and Qualitative Disclosures
About Market Risk 15-16
2
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SPIEGEL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
($000s omitted, except per share amounts)
<TABLE>
<CAPTION>
(unaudited) (unaudited)
July 1, July 3, January 1,
2000 1999 2000
------------ ------------ ------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 32,411 $ 25,967 $ 46,023
Receivables, net 1,014,772 633,718 971,566
Inventories 507,220 491,896 499,413
Prepaid expenses 113,209 98,463 101,915
Refundable income taxes -- 11,041 3,830
Deferred income taxes 41,380 25,974 41,397
------------ ------------ ------------
Total current assets 1,708,992 1,287,059 1,664,144
Property and equipment, net 332,912 341,649 333,852
Intangible assets, net 147,111 151,941 148,143
Other assets 108,984 86,780 95,901
------------ ------------ ------------
Total Assets $ 2,297,999 $ 1,867,429 $ 2,242,040
------------ ------------ ------------
------------ ------------ ------------
LIABILITIES and STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of debt $ 125,714 $ 184,464 $ 214,464
Accounts payable and accrued liabilities 573,590 478,006 644,455
------------ ------------ ------------
Total current liabilities 699,304 662,470 858,919
Long-term debt, excluding current maturities 741,857 521,572 566,572
Deferred income taxes 91,449 38,132 91,409
------------ ------------ ------------
Total liabilities 1,532,610 1,222,174 1,516,900
Stockholders' equity:
Class A non-voting common stock,
$1.00 par value; authorized 16,000,000 shares;
14,854,244, 14,791,844 and 14,849,244 shares
issued and outstanding at July 1, 2000,
July 3, 1999 and January 1, 2000,
respectively 14,854 14,792 14,849
Class B voting common stock,
$1.00 par value; authorized 121,500,000
shares; 117,009,869 shares issued and
outstanding at July 1, 2000,
July 3, 1999 and January 1, 2000 117,010 117,010 117,010
Additional paid-in capital 329,012 328,713 328,984
Accumulated other comprehensive loss:
Foreign currency translation adjustment (3,174) (3,304) (2,608)
Retained earnings 307,687 188,044 266,905
------------ ------------ ------------
Total stockholders' equity 765,389 645,255 725,140
------------ ------------ ------------
Total liabilities and stockholders' equity $ 2,297,999 $ 1,867,429 $ 2,242,040
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
3
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SPIEGEL, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
($000s omitted, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-six Weeks Ended
-------------------------- --------------------------
July 1, July 3, July 1, July 3,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales and other revenues:
Net sales $ 711,770 $ 681,331 $ 1,339,247 $ 1,245,856
Finance revenue 80,610 57,722 156,807 108,676
Other revenue 13,558 12,900 24,751 22,598
------------ ----------- ------------ ------------
805,938 751,953 1,520,805 1,377,130
Cost of sales and operating expenses:
Cost of sales, including buying and
occupancy expenses 434,443 438,565 845,884 822,820
Selling, general and administrative
expenses 314,920 270,361 571,802 514,011
------------ ----------- ------------ ------------
749,363 708,926 1,417,686 1,336,831
------------ ----------- ------------ ------------
Operating income 56,575 43,027 103,119 40,299
Interest expense 15,559 15,094 30,015 29,336
------------ ----------- ------------ ------------
Earnings before income taxes 41,016 27,933 73,104 10,963
Income tax provision 15,176 11,453 27,049 4,495
------------ ----------- ------------ ------------
Net earnings $ 25,840 $ 16,480 $ 46,055 $ 6,468
------------ ----------- ------------ ------------
------------ ----------- ------------ ------------
Net earnings per common share:
Basic and diluted $ 0.20 $ 0.13 $ 0.35 $ 0.05
------------ ----------- ------------ ------------
------------ ----------- ------------ ------------
Weighted average number of common
shares outstanding:
Basic 131,859,388 131,801,423 131,859,250 131,794,967
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Diluted 131,981,831 131,911,572 131,983,364 131,902,246
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
4
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SPIEGEL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
($000s omitted)
(unaudited)
<TABLE>
<CAPTION>
Twenty-six Weeks Ended
July 1, July 3,
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 46,055 $ 6,468
Adjustments to reconcile net earnings to
net cash used in operating activities:
Depreciation and amortization 33,534 38,245
Net gains on sale of receivables (23,655) --
Change in assets and liabilities,
net of effects of acquisition:
Increase in receivables, net (19,551) (89,572)
Increase in inventories (7,807) (981)
Increase in prepaid expenses (11,294) (5,073)
Decrease in accounts payable and accrued liabilities (73,071) (99,531)
Increase in income taxes 6,094 3,254
------------ ------------
Net cash used in operating activities (49,695) (147,190)
------------ ------------
Cash flows from investing activities:
Net additions to property and equipment (21,407) (10,794)
Net additions to other assets (23,238) (6,054)
------------ ------------
Net cash used in investing activities (44,645) (16,848)
------------ ------------
Cash flows from financing activities:
Issuance of debt 246,000 158,000
Payment of debt (159,465) (60,714)
Payment of dividends (5,274) --
Exercise of stock options 33 268
------------ ------------
Net cash provided by financing activities 81,294 97,554
------------ ------------
Effect of exchange rate on cash (566) 1,251
Net change in cash and cash equivalents (13,612) (65,233)
Cash and cash equivalents at beginning of year 46,023 91,200
------------ ------------
Cash and cash equivalents at end of period $ 32,411 $ 25,967
------------ ------------
------------ ------------
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 30,637 $ 30,063
------------ ------------
------------ ------------
Income taxes $ 21,206 $ 1,813
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
5
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SPIEGEL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($000s omitted)
(unaudited)
(1) Basis of presentation
The consolidated financial statements included herein are unaudited and have
been prepared from the books and records of the Company in accordance with
generally accepted accounting principles and the rules and regulations of the
Securities and Exchange Commission. All adjustments (consisting only of normal
recurring accruals) which are, in the opinion of management, necessary for a
fair presentation of financial position and operating results for the interim
periods are reflected. These financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's most recent Annual Report on Form 10-K, which
includes financial statements for the fiscal year ended January 1, 2000. Due
to the seasonality of the Company's business, results for interim periods are
not necessarily indicative of the results for the year.
(2) Debt
In June 2000, the Company amended its existing revolving credit agreement
to increase the commitment from $500,000 to $750,000. The current
commitment is comprised of two components including a $600,000 long-term
agreement maturing in July 2003 and a $150,000 364 day agreement maturing in
June 2001. Additionally, in conjunction with the maturity of certain senior
and subordinated term indebtedness, the Company entered into four new senior
term loan agreements totaling $95,000, due June 2005 through June 2007.
(3) Dividends
In the second quarter of 2000, the Company resumed payment of quarterly
dividends to shareholders. A quarterly dividend of four cents per share
totaling $5,274 was paid on May 15, 2000 to shareholders of record on
May 8, 2000.
6
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(4) Comprehensive income
The components of comprehensive income for the thirteen- and twenty-six week
periods ended July 1, 2000 and July 3, 1999 are as follows:
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-six Weeks Ended
-------------------------- --------------------------
July 1, July 3, July 1, July 3,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income $ 25,840 $ 16,480 $ 46,055 $ 6,468
Foreign currency
translation adjustment (492) 609 (566) 1,251
------------ ------------ ------------ ------------
Comprehensive income $ 25,348 $ 17,089 $ 45,489 $ 7,719
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
(5) Accounts payable and accrued liabilities
Accounts payable and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
July 1, July 3, January 1,
2000 1999 2000
------------ ------------ ------------
<S> <C> <C> <C>
Trade payables $ 186,685 $ 169,418 $ 225,859
Deposits 122,513 73,467 79,475
Gift certificates and
other customer credits 40,224 34,514 49,183
Salaries, wages and
employee benefits 63,716 34,218 91,377
General taxes 62,965 83,979 87,413
Allowance for future returns 24,585 24,625 34,525
Income taxes 2,207 -- --
Other liabilities 70,695 57,785 76,623
------------ ------------ ------------
Total accounts payable and
accrued liabilities $ 573,590 $ 478,006 $ 644,455
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
7
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(6) Segment reporting
Segment revenues and operating profit, including a reconciliation to
the Company's consolidated earnings before income taxes, follows:
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-six Weeks Ended
-------------------------- --------------------------
July 1, July 3, July 1, July 3,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
Merchandising $ 772,457 $ 734,666 $ 1,454,685 $ 1,344,094
Bankcard 33,481 17,287 66,120 33,036
------------ ------------ ------------ ------------
Total revenue $ 805,938 $ 751,953 $ 1,520,805 $ 1,377,130
------------ ------------ ------------ ------------
Operating income:
Merchandising $ 48,045 $ 43,203 $ 77,944 $ 36,149
Bankcard 9,304 854 26,169 5,418
------------ ------------ ------------ ------------
Total segment operating
income 57,349 44,057 104,113 41,567
Premium on acquisitions (774) (1,030) (994) (1,268)
------------ ------------ ------------ ------------
Total operating income 56,575 43,027 103,119 40,299
Interest expense 15,559 15,094 30,015 29,336
------------ ------------ ------------ ------------
Earnings before income
taxes $ 41,016 $ 27,933 $ 73,104 $ 10,963
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
8
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Item 2.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
($000s omitted, except per share amounts)
RESULTS OF OPERATIONS
Net earnings for the thirteen week period ended July 1, 2000 were $25,840,
or $0.20 per share basic and diluted, compared to $16,480, or $0.13 per share
basic and diluted, for the thirteen week period ended July 3, 1999. The
second quarter 2000 results included net pretax gains related to the sale of
receivables of $8,164. There were no comparable gains recorded in the 1999
period. The earnings improvement reflects the favorable performance of the
Company's bankcard segment. Positive sales and margin performance in the
Company's merchandising segment was offset by increases in expenses related to
investment in e-commerce marketing initiatives and site enhancements coupled
with planned increases in customer acquisition catalogs.
Net earnings for the twenty-six week period ended July 1, 2000 were $46,055,
or $0.35 per share basic and diluted, compared to $6,468, or $0.05 per share
basic and diluted, for the twenty-six week period ended July 3, 1999. The
current year period included net pretax gains related to the sale of
receivables of $23,655. There were no comparable gains recorded in the 1999
period. The improved performance was driven primarily by stronger customer
response to merchandise offerings and gross margin improvements in the
Company's merchandising segment and included a positive contribution from the
bankcard segment.
9
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Merchandising segment:
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-six Weeks Ended
-------------------------- --------------------------
July 1, July 3, July 1, July 3,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Catalog net sales $ 364,205 $ 369,237 $ 702,680 $ 669,654
E-commerce net sales 46,390 9,655 83,156 17,349
------------ ------------ ------------ ------------
Total direct net sales 410,595 378,892 785,836 687,003
Retail net sales 301,175 302,439 553,411 558,853
------------ ------------ ------------ ------------
Total net sales 711,770 681,331 1,339,247 1,245,856
Finance revenue 48,724 40,435 93,235 75,640
Other revenue 11,963 12,900 22,203 22,598
------------ ------------ ------------ ------------
Total revenue $ 772,457 $ 734,666 $ 1,454,685 $ 1,344,094
------------ ------------ ------------ ------------
Operating income $ 48,045 $ 43,203 $ 77,944 $ 36,149
------------ ------------ ------------ ------------
% change
Total net sales 4% 10% 7% 8%
Comparable-store sales (5)% 7% (3)% 6%
Total revenue 5% 11% 8% 9%
------------ ------------ ------------ ------------
Gross profit margin
(% of total net sales) 39.0% 35.7% 36.9% 34.0%
SG&A expenses
(% of total revenue) 37.6% 34.4% 36.5% 36.1%
Operating income
(% of total revenue) 6.2% 5.9% 5.4% 2.7%
------------ ------------ ------------ ------------
</TABLE>
Thirteen weeks ended July 1, 2000 compared to thirteen weeks ended July 3, 1999
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Operating income for the merchandising segment increased to $48,045 in the
thirteen weeks ended July 1, 2000 compared to $43,203 for the thirteen weeks
ended July 3, 1999. Net pretax gains related to the sale of receivables of
$5,004 favorably impacted the second quarter 2000 results. There were no
comparable gains recorded in the 1999 period. Excluding the impact of the
receivable gains, the merchandising segment's performance was essentially flat
to last year. Positive sales and margin improvements were offset by increases
in expenses related to investment in e-commerce marketing initiatives and site
enhancements coupled with planned increases in customer acquisition catalogs.
Total merchandising revenue increased $37,791 in the thirteen weeks ended
July 1, 2000 compared to the same period last year, driven by a 4 percent
increase in net sales and a 20 percent increase in finance revenue.
10
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Total direct net sales, comprised of catalog and e-commerce net sales, drove
the increase in net sales over the prior year period. E-commerce net sales
continued to grow at a rapid pace at each merchant division, rising 380 percent
to $46,390, or 7 percent of total net sales, compared to $9,655, or 1 percent
of total net sales, in the prior year period. Catalog net sales declined 1
percent in the second quarter compared to the prior year period. Growth at
Spiegel and Newport News, driven by strong customer response to merchandise
offerings on increased catalog circulation, was more than offset by declines
at Eddie Bauer. Retail net sales were flat for the second quarter of 2000,
reflecting a 5 percent decline in Eddie Bauer comparable-store sales offset by
an increase in outlet stores sales and the effect of financial adjustments.
Overall, Eddie Bauer experienced lackluster customer response to its
spring/summer merchandise offerings in the period.
Finance revenue increased 20 percent in the thirteen weeks ended July 1, 2000
compared to the prior year period due to a $5,004 net pretax gain recognized
related to the sale of receivables and growth in the FCNB Preferred charge
portfolio. There were no comparable gains recorded in the 1999 period.
Average FCNB Preferred receivables serviced for the quarter increased 32
percent, reflecting sales growth at Spiegel and Newport News accompanied by an
increase in customer utilization of the private-label credit programs.
Merchandising gross profit margin on net sales increased 330 basis points to
39.0 percent for the thirteen weeks ended July 1, 2000 from 35.7 percent for
the comparable 1999 period. The favorable margin performance resulted primarily
from higher initial profits and a shift in the sales mix towards higher-margin
apparel and private-label products. While each merchant division contributed
to the margin improvement, Spiegel achieved particularly strong margin growth
benefiting from stronger customer response to merchandise offerings and,
in turn, lower markdowns compared to last year. Total inventories at
quarter-end were 3 percent higher than last year.
The selling, general and administrative expense ratio increased 320 basis
points to 37.6 percent of total revenue compared to 34.4 percent in the same
period last year. This increase was primarily due to investments in e-commerce
marketing initiatives and site enhancements coupled with planned increases in
customer acquisition catalogs.
Twenty-six weeks ended July 1, 2000 compared to twenty-six weeks ended
July 3, 1999
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Operating income for the merchandising segment increased $41,795 in the
twenty-six weeks ended July 1, 2000 to $77,944 compared to $36,149 for the
prior year period. Net pretax gains related to the sale of receivables of
$13,647 favorably impacted the 2000 period results. There were no comparable
gains recorded in the 1999 period. Improved gross margin performance on
increased sales drove the progress in the current year period. The
merchandising segment also benefited from a positive earnings contribution from
the FCNB Preferred charge programs.
11
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Total merchandising revenue for the twenty-six weeks ended July 1, 2000
increased $110,591, or 8 percent, compared to the same period last year. The
growth in revenue was primarily attributable to a 7 percent increase in net
sales and a 23 percent increase in finance revenue.
Total direct net sales, comprised of catalog and e-commerce net sales, drove
the increase in net sales over the prior year period. E-commerce net sales
continued to grow at a rapid pace at each merchant division, rising 379 percent
to $83,156, or 6 percent of total net sales, compared to $17,349, or 1 percent
of total net sales, in the prior year period. Catalog net sales increased 5
percent in the current year period as growth at Spiegel and Newport News,
driven by strong customer response to merchandise offerings on increased
catalog circulation, outpaced declines realized at Eddie Bauer. Retail net
sales decreased 1 percent in the period, reflecting a 3 percent decline in
Eddie Bauer comparable-store sales, somewhat offset by strong outlet store
sales.
Finance revenue increased 23 percent in the twenty-six weeks ended July 1, 2000
compared to the prior year period due to a $13,647 net pretax gain recognized
related to the sale of receivables and growth in the FCNB Preferred charge
portfolio. There were no comparable gains recorded in the 1999 period.
Average Preferred receivables serviced for the period increased 29 percent,
reflecting sales growth at Spiegel and Newport News accompanied by an increase
in customer utilization of the private-label credit programs.
Merchandising gross profit margin on net sales increased 290 basis points to
36.9 percent for the twenty-six weeks ended July 1, 2000 from 34.0 percent for
the comparable 1999 period. The favorable margin performance resulted primarily
from higher initial profits and a shift in the sales mix towards higher-margin
apparel and private-label products. While each merchant division contributed
to the margin improvement, Spiegel achieved particularly strong margin growth
benefiting from stronger customer response to merchandise offerings and,
in turn, lower markdowns compared to last year. Total inventories ended the
period 3 percent higher than last-year levels.
The selling, general and administrative expense ratio increased slightly to
36.5 percent of total revenue compared to 36.1 percent in the same period last
year. This increase was primarily due to investments in e-commerce marketing
initiatives and site enhancements coupled with planned increases in customer
acquisition catalogs.
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Bankcard segment:
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-six Weeks Ended
--------------------------- --------------------------
July 1, July 3, July 1, July 3,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Total revenue $ 33,481 $ 17,287 $ 66,120 $ 33,036
Operating income $ 9,304 $ 854 $ 26,169 $ 5,418
------------ ------------ ------------ ------------
</TABLE>
Thirteen weeks ended July 1, 2000 compared to thirteen weeks ended July 3, 1999
--------------------------------------------------------------------------------
Bankcard revenue increased significantly in the thirteen weeks ended
July 1, 2000 compared to the prior year period, driven by substantial growth
in the receivable portfolio. Average bankcard receivables serviced in the
second quarter increased 67 percent over the comparable period last year with
a corresponding increase in average receivables sold. The increase in
receivables sold led to an increase in the net excess recognized as finance
revenue from these sold receivables. The net excess represents the residual
amount of finance charges and fees over the sum of the return paid to
certificate holders, contractual servicing fees, and credit losses. The net
excess also was positively impacted by a shift in the portfolio mix to
lower-risk credit products which resulted in reduced delinquencies and,
in turn, lower charge-off rates compared to the prior year. Net pretax gains
on the sale of receivables of $3,160 were recognized in finance revenue in the
second quarter of 2000. There were no comparable gains recorded in the
1999 period.
Bankcard operating income improved in the second quarter of 2000 compared
to the prior year period, reflecting strong growth and favorable operating
trends. The bankcard segment continues to benefit from improved charge-off
and delinquency trends realized in the credit portfolio.
Twenty-six weeks ended July 1, 2000 compared to twenty-six weeks ended
July 3, 1999
--------------------------------------------------------------------------------
Bankcard revenue more than doubled in the first half of fiscal 2000 compared
to the prior year period, driven by substantial growth in the receivable
portfolio. Average bankcard receivables serviced increased 64 percent over
the comparable period last year with a corresponding increase in average
receivables sold. The increase in receivables sold led to an increase in the
net excess recognized as finance revenue from these sold receivables. The net
excess represents the residual amount of finance charges and fees over the sum
of the return paid to certificate holders, contractual servicing fees, and
credit losses. The net excess also was positively impacted by a shift in the
portfolio mix to lower-risk credit products which resulted in reduced
delinquencies and, in turn, lower charge-off rates compared to the prior year.
Net pretax gains on the sale of receivables of $10,008 were recognized in
finance revenue in the current year period. There were no comparable gains
recorded in the 1999 period.
Bankcard operating income improved significantly in the twenty-six weeks ended
July 1, 2000 compared to the prior year period, reflecting strong growth and
favorable operating trends. Contributing to the progress was the favorable
impact of improved delinquency and charge-off trends realized in the credit
portfolio, offset slightly by an increase in costs associated with new
customer acquisition.
13
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Interest expense:
Interest expense was $30,015 for the twenty-six weeks ended July 1, 2000 versus
$29,336 for the comparable period last year. The increase in interest expense
resulted primarily from higher average debt levels compared to the prior year,
driven by funding requirements to support customer receivable growth. The
Company realized lower average interest rates in total for the period despite
increases in LIBOR rates, primarily due to a decrease in debt-related fees
recognized in the current year period.
SEASONALITY AND QUARTERLY FLUCTUATIONS
The Company, like other retailers, experiences seasonal fluctuations in its
revenues and net earnings. Historically, a significant amount of the Company's
net sales and a majority of its net earnings have been realized during the
fourth quarter. Accordingly, the results for the individual quarters are not
necessarily indicative of the results to be expected for the entire year.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically met its operating and cash requirements
through funds generated from operations, the securitization of customer
accounts receivable and the issuance of debt and common stock. Total
customer receivables sold were $1,888,982 at July 1, 2000, $1,392,730
at July 3, 1999 and $1,639,981 at January 1, 2000.
Net cash used by operating activities totaled $49,695 and $147,190 for
the twenty-six week periods ended July 1, 2000 and July 3, 1999,
respectively. Cash provided by securitization activity increased $277,001
over the prior year period, minimizing the need to fund the significant
growth in customer receivables through other sources. Excluding receivables,
net cash flow from operations improved $27,474 compared to the prior year.
Favorable operating results and cash provided by the issuance of jumbo
certificates of deposit by the Company's special purpose bank drove the
improvement, offset somewhat by increased investment in inventories to
support sales growth. Total inventories ended the period 3 percent higher
than last year levels.
Net cash used in investing activities totaled $44,645 for the twenty-six
weeks ended July 1, 2000 compared to $16,848 in the prior year period.
Expenditures in the current year were comprised primarily of Eddie Bauer
retail store expansion and remodeling, distribution facility upgrades and
information technology related projects. Expenditures in the comparable
1999 period were primarily related to Eddie Bauer retail store expansion
and remodeling.
In April 2000, the Company announced it would resume payments of quarterly
dividends to shareholders. On May 15, 2000, the Company made a quarterly
dividend payment of four cents per share totaling $5,274 to shareholders
of record on May 8, 2000.
14
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The Company believes that its cash on hand, together with cash flows
anticipated to be generated from operations, borrowings under its existing
credit facilities, securitizations of customer receivables and other available
sources of funds, will be adequate to fund the Company's capital and operating
requirements for the foreseeable future.
MARKET RISK
The Company is exposed to market risk from changes in interest rates, the
securitization of customer receivables and, to a lesser extent, foreign
currency exchange rate fluctuations. In seeking to minimize risk, the Company
manages exposure through its regular operating and financing activities and,
when deemed appropriate, through the use of derivative financial instruments.
The Company does not use financial instruments for speculative purposes and
is not party to any leveraged financial instruments.
Interest rates:
The Company manages interest rate exposure through a mix of fixed- and
variable-rate financings. The Company is generally able to meet certain
targeted objectives through its direct borrowings. Substantially all of
the Company's variable-rate exposure relates to changes in the one-month
LIBOR rate. If the one-month LIBOR rate had changed by 50 basis points,
the Company's second quarter 2000 interest expense would have changed by
approximately $413. In addition, derivative financial instruments are
utilized occasionally to reach the Company's targeted objectives. Interest
rate swaps may be used to minimize interest rate exposure when appropriate
based on market conditions. The notional amounts of the Company's interest
rate swap agreements totaled $58,571 at July 1, 2000.
The Company believes that its interest rate exposure management policies,
including the use of derivative financial instruments, are adequate to limit
any material market risk exposure to its consolidated financial statements at
July 1, 2000.
Securitizations:
In conjunction with its asset-backed securitizations, the Company recognizes
gains representing the present value of estimated future net cash flows the
Company will receive over the estimated outstanding period of the asset
securitization. These future cash flows consist of an estimate of the excess
of finance charges and fees over the sum of the return paid to certificate
holders, contractual servicing fees, and credit losses along with the future
finance charges and principal collections related to interests in the customer
receivables retained by the Company. These estimates are calculated utilizing
the current performance trends of the receivable portfolios. Certain estimates
inherent in determining the present value of these estimated future net cash
flows are influenced by factors outside the Company's control, and, as a
result, could materially change in the near term.
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Foreign currency exchange rates:
The Company is subject to foreign currency exchange risk related to its
Canadian operations, as well as its joint venture investments in Germany and
Japan. The Company is party to certain transactions with the above joint
ventures that are denominated in foreign currencies. The Company monitors the
exchange rates related to these currencies on a continual basis and will enter
into forward derivative contracts for foreign currency when deemed advantageous
based on current pricing and historical information. The Company believes that
its foreign exchange risk and the effect of this hedging activity are not
material due to the size and nature of the above operations.
ACCOUNTING STANDARDS
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," and No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities," establish
accounting and reporting standards for derivatives and for hedging activities.
As issued, SFAS No. 133 was effective for all fiscal quarters of all fiscal
years beginning after June 15, 1999. In June 1999, SFAS No. 137 was issued,
effectively deferring the date of required adoption of SFAS No. 133 to fiscal
quarters of all fiscal years beginning after June 15, 2000. The Company is
studying the statements to determine the effect on the consolidated financial
position or results of operations, if any. The Company will adopt SFAS No. 133
and SFAS No. 138, as required, in fiscal year 2001.
FORWARD-LOOKING STATEMENTS
This report contains statements that are forward-looking within the meaning
of applicable federal securities laws and are based upon the Company's
current expectations and assumptions, which are subject to a number of
risks and uncertainties that could cause actual results to differ materially
from those anticipated. Potential risks and uncertainties include, but are
not limited to, factors such as the financial strength and performance of the
retail and direct marketing industry, changes in consumer spending patterns,
dependence on the securitization of accounts receivable to fund operations,
state and federal laws and regulations related to offering and extending
credit, risks associated with collections on the Company's credit card
portfolios, interest rate fluctuations, postal rate increases, paper or
printing costs, the success of planned merchandising, advertising, marketing
and promotional campaigns, as well as other risks indicated in other filings
with the Securities and Exchange Commission such as the Company's most recent
Form 10-K.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPIEGEL, INC.
<TABLE>
<CAPTION>
Signature Title Date
------------------------- -------------------------- ----------------
<C> <S> <C>
/s/ James W. Sievers Office of the President, August 15, 2000
James W. Sievers Chief Financial Officer
(Principal Operating
Executive Officer and
Principal Financial
and Accounting Officer)
</TABLE>
